Kevin Bell

📩 - How To Value Any Business

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~3.5min Read

Entrepreneurship Through Acquisition (ETA) is gaining more and more traction in the entrepreneur community that it didn’t have even 5 years ago.

If you're not familiar with ETA, it's the process of BUYING a business rather than starting one from the ground up.

I talk about it HERE and HERE.

In many ways, you're skipping the line.

Instead of going through the start up phase of taking an idea off the ground, finding customers, marketing your service or product, pivoting, adjusting, iterating over a few years, with ETA the business ALREADY exists and is ALREADY making money.

You wouldn't want to buy it if it wasn't.

It’s taking the business mind of the entrepreneur and matching that with the acquisition mind of the real estate investor.

SUCH a great combo.

Today we’re going to dive in the ETA pool. I’m going to:

Show you how to evaluate a business on the back of a napkin Send you some deals. No strings attached. Seriously!

Before I jump in here, I'm not a math guy. I've beat my head against the wall plenty of times trying to understand valuing deals. I'm STILL learning. But my hope is that I can pass on what i've learned and simplify the process for you the best I can.

But i'll take it a step further, If you want to walk through one with me and have some questions, email me back and let’s chat.

Back of napkin deal analysis:

THE EQUATION: [Earnings] X [Multiple] = Valuation

Now let’s define each of those.

Earnings is going to be either the SDE (seller disciplinary earnings) or EBITDA (Earnings Before Interest Taxes Depreciation or Amortization)

model 1

In the image above you can see that the financials provided show both the SDE and EBITDA. In this case there isn't much difference between EBITDA and SDE.

The general rule of thumb is you’ll use SDE with smaller mom and pop businesses with less than $1.5M in revenue. All other businesses EBITDA will be the number.

"Gross sales" on this is considered the revenue so we will stick with SDE for the calculations.

THE MULTIPLE:

Here's the tricky part -- There isn’t a specific number for each business that will be available.

BUT there is a spectrum and the more comfortable you get looking at these businesses and what they offer, the quicker you’ll be able to determine where they fall on the spectrum of multiples.

Generally, the range that you will see most often is the 3-7x multiple range. There will always be exceptions, but for the most part that's the spectrum right there.

The three variables that drive a companies multiple are SIZE, INDUSTRY and COMPANY FACTORS.

This chart covers two of those factors right off the bat.

  1. What industry is it?
  2. How much is it making?

model 2

Using the example of the business above, it's an HVAC business that we were looking at. That falls under the "construction & Engineering" industry.

model 3

And based on the EBITDA of 327,358,wereinthe0−1M range.

model 4

This gets you right there in the range that you want to know. ✅

Next we have the company factors:

All of which are variables to look at when going through the financials and documents available.

Based on those variables, the value of the company will go up or down from the range that you already found. And really what I mean by that is based on what discover when looking at the company factors will determine what YOU are willing to pay.

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Putting it all together:

  1. You know the industry
  2. You know the size
  3. You know the average multiple

Like I said, as you go through and find out the various company factors, you will be looking for ONE thing here: How risky would it be for YOU to buy this business...

There will always be hair on a deal, it's just a matter of how much hair you're willing to deal with. The riskier you feel the deal is, the less you should be willing to pay.

Now if you’re eyes are glossing over, I don’t blame you. This is definitely an art, not a science.

The goal is that you look at enough deals eventually that you’ll be able to come up with this range easily.

And further more, when you see a listing from a broker, you’ll know immediately if it’s fairly priced.

I plan to share as many deals and case studies as I can with you so that this becomes second nature.

If you have deals you're looking at and want help breaking them down, I'd be happy to take a look. You can email me screenshots of the listing with the name cut off if you want to keep it confidential.🤫

And if you are working on a deal and need help taking it down, I can help connect you with someone in our network that might be interested in investing with you. Myself included if it fits our buy box.

Until next time...

Stay in the fight,

kevin sig