- Price Earnings Ratio – this is commonly used if the company is established and has been making reasonable levels of profits. Sometimes a multiple of EBITDA is used for industries that are not capital intensive.
- Discounted Cash Flow – this is often used when the company has invested heavily in the past and is expecting some growth in the future.
- Multiple of revenue – used by some industries that are fairly predictable in their cost base and structure. Ie supermarkets, accountancy firms etc.
- Entry cost – Used to establish the cost it would take another company to start the business.
- Entry cost plus opportunity lost – the same as above plus the potential opportunity lost given the time it would take to start from scratch.
- Value of net assets – Often used when the company has substantial tangible assets such as property.
- Industry “rule of thumb” – some industry sectors have recognisable valuation methods.
- Comparables – looking at similar sized transactions within the same sector.
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I have a conversation nearly every week with the owners of small and medium-sized companies about how much their company is worth. The truth is that it is only worth what someone else is willing to pay for it. However, to get a sense of what the analysts and accountants use to value businesses it is worth knowing the commonly used methods:
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