Valuation based on capitalization of earnings vs market multiples

by a searcher

2 years ago

Curious which valuation technique are used for what uses cases ? does one favors the seller better than the other ? When looking at the business values using capitalization method, as a buyer what should they be aware of / careful of ?

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39 comments

searcher from University of Kentucky

Amby: I prefer using both EBITDA multiple and DCF (projecting based on historical). This comparison gives me a good sense for "richness" of the deal, and a smell test to see if the required growth is possible (based on DCF growth assumptions given the current or projected macro and and industry environment) to justify the EBITDA multiple. Also, when performing DCF on an asset rich business, don't forget to include the expected exit market value (or liquidity value if you choose) of the asset and all maintenance and reserves that are needed annually for the asset up keep. Small private companies are notorious for not reinvesting to maintain assets.

All the best!

Regards,
Madan.

2 years ago | like reply | 0 likes

professional from University of Southern California - Marshall School of Business

Be careful of anecdotal info. You can get a reality check re valuation by asking sources of financing for business acquisitions. Appraisers, approved for writing reports for SBA financing, are another reliable source of info.

(Having, earlier in my career, run a national business appraisal practice for 20-years, I’ve seen too many people proceed to dead-ends because they misunderstood valuation while they try to buy or sell SMBs. I see it today, too, in my advisory work.)

2 years ago | like reply | 1 like

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