Valuing a business is a process of determining an appropriate measure of profit and a multiple to multiply it by to approximate the ROI a business valuation is based on.
Businesses are bought and sold based on ROI, the return/profit someone will earn from owning a business.
The strengths and weaknesses of the business assets to prosper in the opportunities and threats of the market help determine the multiple and the expectations of maintainable and growing profits.
Profits are determined by the historical financial performance of the business. Forecasting profits will be based on the historical profits plus expectations of maintainability and growth from the strengths and weaknesses of the business assets to prosper in the opportunities and threats of the market.
A $1M+ business valuation is based on multiples of EBIT (or EBITDA) rather than the EBPITD basis of buy-a-job business valuations.
Measures of Business Profit Used in Appraising a Business Sale Price
- ROI is Return on Investment
- EBIT is Earnings Before Interest and Tax
- EBITDA is Earnings Before Interest, Tax, Depreciation, and Amortization
- OCS is Owner’s Cash Surplus, also referred to as EBPITD
- EBPIDT is Earnings Before Proprietors Income (wages or drawings) Interest and Depreciation. (This is sometimes called the Sellers Discretionary Cashflow.) This determines the basic earning capability of the businesses before any other variables – including 1. Net Profit before taxation 2. Proprietors income (including salary, wage, directors fees) 3. Any Interest paid 4. Any depreciation claimed
