Back in my corporate finance days, I was knee-deep in valuations and financial due diligence for small businesses. I always joked with my boss at the time that it was the easiest job ever. Just figure out the profit, or what we finance folks call the normalised EBITDA, and then you multiply it by three.
But why three times? Why not two or even ten?
I’m Jason Andrew, and this is Stark Naked Numbers – the podcast that strips down the numbers of business, investing, and wealth creation to help you become a better entrepreneur and investor, and ultimately build your net worth.
In this episode, I'm joined by my good friend and valuation nerd, Simon Cook. Simon’s a chartered accountant, and an expert when it comes to valuing businesses.
Today we're giving you a masterclass in small business valuations. If you're an entrepreneur that's either buying or selling a business, listen up. This may give you a slight edge at the negotiating table.
Links:
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To learn more about uncovering your financials, unlocking your cash and unleashing your cash, visit starknakednumbers.com.
Show Notes:
(01:52) – The difference between price and value.
(04:00) – How to value a business: forecasting future cash flow and investment risk.
(12:21) – A cautionary tale of WeWorks “tech company” debacle.
(15:20) – Establishing a discount rate or required return.
(17:55) – Investing in private companies and grappling with liquidity.
(22:35) – The pitfalls of relying solely on the multiples model for business valuation.
(47:58) – Applying multiples to EBITDA versus cash flow.
(01:00:02) – Enterprise value versus equity value: What’s the difference?
(01:06:16) - Working capital adjustment in the valuation process
(01:10:23) – Deciding between revenue-based multiples and profit-based metrics
Stark Naked Numbers