Valuation Methodology


The Multiple of Discretionary Earnings Method was originally developed to value small “main street” businesses. It has been adapted by business brokers to value both small and medium sized businesses, i.e., up to several million dollars in revenue. This method is also used by many business appraisers for smaller companies.

The Market Data Method based on transactions of businesses in the same industry/SIC code or industry rules of thumb, is the most direct method of valuing privately held companies. The Market Data Method is used by both appraisers and brokers. This method uses multiples observed in the sale of similar assets in the market. For example:
Value = Price/SDE

Value = Price/Revenue

Value = Price/EBIT

Value = Price/EBIT

The Buyer’s Test Method determines the maximum value at which the business can:
Pay the buyer a reasonable salary;

Provide the buyer a reasonable return on his/her down payment;

Cover annual capital expense;

Cover annual debt service with the required debt coverage ratio.