Valuing a business using multiples involves multiplying a key financial metric—typically EBITDA, revenue, or Seller’s Discretionary Earnings (SDE)—by an industry-standard factor derived from comparable company sales. The formula is: Business Value = Metric × Multiple B u s i n e s s V a l u e = M e t r i c × M u l t i p l e . Key steps include selecting appropriate metrics, finding similar company data, and adjusting for risk and growth.
In order to determine the Enterprise Value of the business, you find the EBITDA from the business you're valuing, and then multiply this by the EBITDA multiple observed from the other comparable companies. This EBITDA multiple is the EV/EBITDA ratio. From this we determine the Enterprise Value of the business.
Profit Multiplier method
The value of the company is calculated by multiplying the profits of the business. This is also called the Price to Earnings or P/E Ratio, where the price is the value of the company, and earnings is the profits that the company earns.
Example: A retail store is valued by comparing it to three similar stores that recently sold for an average price of 1.5 times their annual revenue. If the target store has annual revenue of $2 million, its estimated value would be $3 million.
The most commonly used rule of thumb is simply a percentage of the annual sales, or better yet, the last 12 months of sales/revenues.
Service businesses typically sell for 2-3x their annual profit because they often depend heavily on the current owner's relationships and expertise. Manufacturing companies tend to command higher multipliers, often 4-5x their annual profit, due to their tangible assets and established processes.
Determining Your Business's Market Value
A common approach to estimating your business's value is the Earnings Multiple Method. Essentially this is Earnings times a multiple. For example, if a business earns $1 million per annum, and the multiple is 3 times, then the value is $3 million. This will then be adjusted to allow for Assets and working capital.
For example, a business with an annual revenue of $200,000 and a valuation multiple of 2.5 would have a value of $500,000. However, the accuracy of a revenue-based valuation relies heavily on selecting the right multiple for your business.
High-end items (e.g., watches, cars, yachts) can have valuations manipulated through fictitious invoices or staged private sales. Criminals artificially raise or lower reported prices, disguising illicit proceeds as legitimate gains or concealing true wealth.
Revenue/ earnings multiple
A more common - and simpler - method of valuing small and medium businesses uses a multiple of revenue or earnings. This calculation involves taking a company's earnings after all business expenses are paid and using an industry multiplier to generate a value.
12 common valuation mistakes
Allow us to introduce the “Four Pillars of Value”: revenue, cost, risk, and time. These pillars are not mutually exclusive but together form a robust framework to articulate and maximize value. Let's break them down and see how they specifically apply to the legal services industry.
In most industries, 30% is a very high net profit margin. Companies with a profit margin of 20% generally show strong financial health. If this metric drops to around 5% or lower, most businesses will need to make changes to remain sustainable.
Main Street Deals (Sub $3m Revenue)
Companies with under $3m in sales will typically sell for 2.5 – 3.5 X their discretionary earnings (total cash the owner could take out of the company). Smaller companies that are even more owner-reliant will even be lower than that.
The multiplier for a small to midsized business will generally fall between 1 and 3‚ meaning‚ that you will multiply your earnings before interest and taxes (EBIT) by either 1X‚ 2X or 3X. For larger‚ more established organizations‚ the multiplier can be 4 or higher.