Mind Your Business: Valuation Methods

By Steve Michaels

Question: How can I determine what my telemessaging business is worth?

Answer: There are four basic ways to valuate a business: 1) a multiple of revenue; 2) a multiple of EBITDA; 3) Price to Earnings (PE) ratio (used for publicly held companies); and 4) free cash flow model. In the telemessaging industry, the first two methods are the most common.

The multiple of revenue is a formula has become an accepted standard in the industry and works in some instances. The problem occurs when two businesses both are receiving the same revenue, but have different profit margins. Using the same revenue multiple would result in the same valuation, even though the return on your investment is different.

A multiple of EBITDA (Earnings Before Interest, Taxes, Depression and Amortization) is the more appropriate way to value and sell a business. Typical EBITDA multiples are 2.5 to 4. The more profit, the higher the multiple. Other factors taken into consideration that can affect the multiple are the area of the country, the type and age of the equipment, the type of service provided, the length of time in business, and a host of other factors.

Steve Michaels is a business broker and can be contacted at 800-369-6126 or at tas@tasmarketing.com for questions. His website is www.tasmarketing.com.

[From Connection Magazine April 2007]