How do business brokers and M&A advisors value businesses?

There are several different methods in valuing a business, however, the four most common used methods are:

  1. Multiple of Earnings - Multiple of earnings is a method of valuing a business based on the company's earnings. Business owners and investors might often come across multiples like EV/ EBITDA or EV/ SDE. These metrics estimate a company's value based on its operating profit. An EV/ EBITDA multiple of 3.0x simply means that if a company generates $100,000 in EBITDA, the value of the entire company is $300,000. While valuing companies, investors and business owners often look at multiples of similar companies to estimate the value of their business.
  2. Multiple of Revenue - Multiple of Revenue is a valuation method whereby companies are valued as a multiple of their aggregate annual sales. If a company's Enterprise Value/ Revenue multiple is 1.5x revenue and it generates $1 million in annual revenue, the company is worth $1.5 million based on this approach.
  3. Net Book Value - Net Book Value is the value of an asset as recorded on the company's balance sheet after accounting for depreciation and other accounting charges. The net book value of a depreciable asset decreases over time. This value is not the same as fair market value or replacement cost of the asset and it is possible that the fair market value of the asset might be worth more than its net book value.
  4. Discounted Cash Flow - Discounted cash flow is a valuation methodology which determines the value of a company based on the present value of future cash flows. The future cash flows are discounted based on the company's weighted average cost of capital, which is a measure of the overall risk of the company's operations. This method is an intrinsic valuation method and depends on the accuracy of model assumptions.

There are also a wide variety of factors that determine which of the four methodology is used including, industry, annual revenue, annual net earnings and assets on the balance sheet.