Business Valuation Basics
This module explores the basic methods used for business valuation and why some of them are not applicable to the middle market.
The Valuation Methodologies discussed:
Asset Based Approach
- Book Value
- Net Asset Value (FMV of assets plus, sometimes, goodwill)
Market Based Approach
- Market comparable (Similar company in type, size, etc.)
- Public Company comparable
Income Based Approach
- Discounted Free Cash Flow
- Multiple of EBITDA
While we eventually settle on using the multiple of EBITDA to estimate company value, exploring the other methods is informative and interesting in regards to learning about discounting for risk, where to look for public company comparable data, etc.
We then show specific EBITDA multiples for different size companies and help explain how to adjust the multiple for risk factors (discussed in a previous learning module) such as customer concentration and positive factors such as recurring revenue. We also talk about what an aggressive growth rate does to the EBITDA multiple, and also how using debt in a transaction allows a buyer to pay more.