Small company Valuations Should Be Simple With all of due respect to those who sell software and tools to do business valuations, it is all rubbish. Small business valuations ought to be simple and should rely only on the few selected metrics.
Franchise OpportunitiesI am astonished at how sophisticated valuation techniques can be but still miss the boat. In fact I used to subscribe to most of the techniques, the DCF method, IRS method, the Capex method the Book Value method, the revenue method. I used to run several types of valuations for every deal. I used to create printed valuation books to provide to the target companies. It was highly impressive but useless. The valuations were always tossed out at the start of the process.
To begin with they overcomplicated everything. Sellers do not actually want to have to understand overcomplicated valuations, anything that adds to the complexity just hurts your chances of getting to an offer.
I gave up valuing companies using sophisticated approaches to favor of the simple multiple of earnings before taxes, interest and depreciation (EBITDA). I'll often use the same multiple of earnings approach for every business and get to a precise valuation in One minute or less. Three to Five times EBITDA. The valuation often needs to be adjusted for several important aspects but as a business buyer you are able to safely make an offer within as well as outside this selection of values.
sell your storeNow here's the interesting part. Basically have valued the organization at Three times EBITDA I might just offer the seller 2 times EBITDA. There is no law that says you are offering what the company is worth. It follows the valuation may bear merely a passing resemblance to the ultimate transaction price too. So do not place too much stock in valuations when purchasing a business. Do the multiple way of a good minute and continue to refine the cost on the way according to the facts that arise throughout the deal process.