With all of due respect to people who sell software and tools to do business valuations, its all rubbish. Small company valuations ought to be easy and should rely only on a few selected metrics.
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I am astonished at how sophisticated valuation techniques can be and still miss the boat. Actually I used to sign up for most of the techniques, the DCF method, IRS method, the Capex method it Value method, the revenue method. I did previously run various kinds valuations for each deal. I used to create printed valuation books to present to the target companies. It had been highly impressive but useless. The valuations were always tossed out early in the process.
For one thing they overcomplicated everything. Sellers dont actually want to need to understand overcomplicated valuations, something that adds to the complexity just hurts your chances of getting to an offer.
I threw in the towel valuing companies using sophisticated approaches to favor of the simple multiple of earnings before taxes, interest and depreciation (EBITDA). Ill often use the same multiple of earnings approach for every business and get to an accurate valuation in 1 minute or less. Three to Five times EBITDA. The valuation often must be adjusted for several key factors but like a business buyer you can safely make an offer within as well as outside this selection of values.
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Now heres the interesting part. Basically have valued the organization at Three times EBITDA I might just provide the seller 2 times EBITDA. There isnt any law saying you have to offer what the clients are worth. It follows that 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 company. Perform the multiple method for a great minute and then refine the price on the way according to the facts that arise during the deal process.
