Tommy Dobczyk breaks down three ways to value a company: the EBITDA approach using earnings multiples, the market approach using revenue multiples, and the asset approach based on what the firm owns. He walks through a hypothetical company valued at $10 million with $4 million in debt to show how each method works.
Chapters
Are you getting deals like this? I had with Charlie was about how to value a company. Does anybody in here know how to value businesses when you're buying them? You use the EBITDA. Okay. EBITDA. That would be considered what they call the— that would be called what they call that the income approach. There's 3 approaches that are typically used in valuing businesses. And one of them is the EBITDA method, which is income. You take your income and what that comes out to is your earnings before. That's what EBITDA stands for, earnings before, and then a bunch of other stuff. Right? Interest, taxes, depreciation, amortization, right? So what are your, what are your earnings before all the bills have to be paid? And then they come up with a multiplier or multiple and then tell you what it comes out to. So what I did was I asked Charlie, I said, Charlie, help me reverse engineer some numbers because if this company was worth $10 million 2 years ago or 4 years ago when we talked and they were $4 million in debt, I imagine they're now $7 million in debt and they're probably needing to be valued higher than that. I said, I need to know, like, just some rough numbers. How, how can I value this company based on the income? The other thing was the market approach. Market approach is to discover, like, what their revenue is and multiply that by a multiplier and base it on the industry that, that we're in. The multiplier, you know, after you take all the liabilities out, the multiplier tells you how much the company's worth that way. And so we looked at that and that revenue and stuff is based on the product. The, the third valuation model that you can use, or, or the way to value a company, uh, its assets. What is the total assets? And based on the fact that this company probably has $4 to $7 million in debt, they would need to own at least $4 to $7 million to be worth zero, right? They would have to have at least $4 to $7 million worth of stuff to own $0.
