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Based in Melbourne (Victoria) we deliver business valuations all over Australia using expert business valuers and resources that allow us to work remotely.

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L3/162 Collins St, Melbourne, 3000

0421 069 717

m.williams@exitvalue.com.au 

Earnings Multiple Valuation Method

This is a simplified method of calculating the value of your business using the earnings multiple method.​

We will walk you through the valuation process and give you a basic guide to business valuation.

The FME Method Business Valuation Formula

This method is the capitalisation of future earnings to arrive at a suitable value for the enterpise or business.  It represents the price at which an equivalent asset would yield the same return for the same level of risk.  It is the most common business valuation method especially for well established businesses.

This business valuation formula using this method is very simple - it is all business valuation P's and Q's:

Value = Price * Quantity

This Business Valuation Formula Is Applicable When

  • This formula requires sufficient profits such that when capitalised the business value exceeds the reported net assets of the enterprise.

  • The business has reached some steady state of profits or will do so in the short term.

  • The risk profile of the business is unlikely to change in the short term.

  • Some reasonable estimate of ongoing earnings or EBITDA can be made.

If these conditions are not met then an alternative method may be required.  This could still be an income method (such as discounted cash flow business valuation) or the asset method.

This typically requires a reasonable EBITDA margin (very industry dependent but usually 5% - 10% or more).  If the business is not commercially viable then return to the main Online Business Valuation Calculation Guide and continue through the flow chart.

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Go to Our Business Valuation Calculation Guide

  1. First read the guide under the heading introduction so that you have grasped the calculation of Adjusted EBITDA and the EBITDA Multiple.

  2. Go to the Income Method section and calculate each item.

  3. For more information on EBITDA multiples see our Valuation Affairs newsletters here.

  4. Fill in the table to calculate the enterprise value of your business

Now return to the main Online Business Valuation Calculation Guide and and continue through the flow chart.

When To Use This Business Valuation Method

This method captures the goodwill in a business based on sufficient EBITDA results.  Because of this it is particularly useful as a business valuation method when you a selling a business.

When buying a business it is useful to compare this result to the reported net assets of the enterprise to see to what extent you are paying for goodwill.  It is important to consider whether this goodwill is likely to continue after you buy a business and may give an indication to what extent the business is overpriced.

This method also allows you to compare your business valuation to that of your competitors (where the information may be known).  If you have a higher EBITDA multiple than your competitors then you have a more attractive business and it is simply down to the size of the EBITDA that determines whether yours has a higher business valuation that your competitors.

This business valuation method is not appropriate when you have made consistent losses and those losses cannot be offset by one-off costs or events that are unlikely to continue in the future.

You can often "engineer" a particular business value using this business valuation method by inflating the projected EBITDA expected in the coming years.  In most cases projected EBITDA should be based on real evidence that someone else with the same information would make the same conclusion.  Give it the sniff test to make sure that the business valuation is believable.

Now return to the main Online Business Valuation Calculation Guide and and continue through the flow chart.

DISCLAIMER

This valuation process and information is general in nature and is to be used at your own risk and discretion.  We take no responsibility for any errors in calculation or judgement that you may make based on our information or advice.

We are not responsible for any commercial loss you may realise as a result of relying on the information or analysis that you complete.