Evaluation of Business Valuation of Earnings Method
Business valuation is the today’s economic value of a business to buy and sell. The business worth cannot be diagnosed with just one financial report rather many management reports must be compared before reaching on a decision either to buy or sell.
Business valuation is also one of the financial reports which informs to management if business is growing or just showing.
Let me phrase it in a quote before we learn with examples.
“A Seller generally say a half truth, whereas the rest buyer has to find”
There are various methods to calculate business value, we will discuss the “Earnings Method” here to find out the value of a business.
Business Valuation Based on Earnings (EBIT): We will demonstrate process to calculate EBIT of a fictitious business David and Sons LLC:
In earning method, we first calculate the net income and add-back the business owners’ personal expenses and business development such as salary, contribution, entertainment, personal insurances, and medical bill, and much more.
What is the business value of David and Sons LLC?
We will use multipliers from two to seven to find out the business value of David and Sons LLC:
Average year sales: $403,940/5= $80,788
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Multiplier Two - $80,788 x 2 = $161,576
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Multiplier Three - $80,788 x 3 = $242,364
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Multiplier Four - $80,788 x 4 = $323,152
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Multiplier Five - $80,788 x 5 = $403,940
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Multiplier Six - $80,788 x 6 = $484,728
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Multiplier Seven - $80,788 x $565,516
Notes:
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Number of Customers can also be considered
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Growth rate can be considered
