Bob Gauvreau breaks down what actually moves a business valuation: normalized EBITDA, which strips out one-time costs, then gets multiplied by 2x to 20x depending on the business. Revenue size, recurring revenue, and whether you need constant reinvestment matter too.
Let's talk about the main KPIs that would impact a business value. Ultimately it really hit depends on so many different things. But I can tell you from my experience as someone who's acquired a business what we essentially look for. And predominantly when we're looking at establishing a value of a business, the major benchmark is going to be on profitability, specifically known as ebitda. Earnings before interest, tax, depreciation, amortization. Now what this calculates is essentially the profitability of the business before any sort of depreciation of assets, taking out the tax expense and eliminating any interest on debt, on long term debt. So it shows the profitability of the business. Now this is a fairly typical sort of approach where you get your normalized ebitda. So normalized being we take out any of the non essential expenses or the non reoccurring expenses. For example, my kids are on payroll. If I were to sell the business, it wouldn't be required that my kids are on payroll. Another area might be some travel expenses. It might not be necessary for travel expenses to be incurred in order for the business to be sold and what essentially the new business owner would be incurring as sort of ongoing expenses. So we do a normalized ebitda, right? And then typically from there there's some sort of multiplier on the EBITDA sort of calculation. So again, EBITDA is representing operational profitability in the business. And sometimes there's a range, you know, sometimes it's as low as maybe two or three times EBITDA. Sometimes it's upwards of 10 to 20 EBITDA depending on so many factors. Revenue. How much revenue is being generated in the business? Do you have reoccurring revenue in your business? Is the business dependent upon you? Is it dependent upon a specific customer or supplier? Is it dependent upon key employees? Are you growing? So there's lots of factors that come into this. Is it a cash cow or is it capital intensive? So you know, EBITDA is really a major factor. There's lots of secondary factors that come in you, you know, are your clients happy? What are the client satisfaction ratings? I would pay more for a company that had high client satisfaction ratings versus low. What are your employee satisfaction ratings? I would pay more for a team that's got high satisfaction versus low satisfaction or disengagement. So lots of different factors in there. Back to the ebitda. The only sort of other financial sort of metric that we look at on a business valuation is is the cash flow related to the business so you might have really high profits, but you might have to reinvest cash flow constantly. New equipment in new vehicles and new machinery versus something that has really low investment costs. And all of that cash is just going back to the owner. So the difference between those two models, the positive cash flow is going to get a higher sort of value than something that is really capital intensive. So we, when you're looking at your business valuation, those would be the considerations that I would be keeping it top of mind.
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