Business Tools Blog

Forgive the oversimplification of a concept that is much more complicated … but I would compare valuing a company to valuing a house.

Have you ever had your home appraised?  The most common method used in real estate appraisals is the Sales Comparison Approach.

1. The appraiser looks at recent sales of like properties (same location, similar size and amenities)
2. The appraiser makes adjustments to the sales price of the properties in #1 to make their features more like your home (ex. a home with hard wood floors sells for more than a home with dirt floors)
3. The appraiser determines a price per square foot
4. The price per foot is multiplied by the square feet in your home to get an estimated value

Determining the value of a company is similar.

1. Find recent sales of like properties (same industry, similar products, services, and customers)
2. Make adjustments to the sales price of recent sales so that their features are more like your company (ex. a company with more fiber network is worth more than a company that sells everything off-net)
3. Determine sale price as a multiple of Revenue and EBITDA
4. To determine the value range for your company, multiply your company’s annual revenue by the Revenue multiple and your company’s annual EBITDA by the EBITDA multiple

Example:
Company ABC sold for $18M
Company ABC has $6M in annual revenue and $1.8M in annual EBITDA (you can find these on the income statement)

The Revenue multiple is $18M/$6M = 3x
The EBITDA multiple is $18M/1.8M = 10x

You did more research and found that all recent sales, once adjusted for any differences in characteristics between the company sold and your company equal about 3x revenue and 10x EBITDA.

If your company’s revenue is $5M annually and your EBITDA is $2M … you  can estimate your company’s value as follows:

Revenue Multiple: $5M*3=$15M
EBITDA Multiple: $2M*10=$20M

Your company’s value is likely to be between $15M and $20M.