It is not uncommon to hear business owners or purchasers referring to a “rule of thumb” basis for valuing a business, e.g. a multiple of turnover or a 6 times EBITDA. It is important to be careful when using these metrics, especially if they are a basis for a business sale/purchase transaction. There are many factors that differentiate the value of businesses within a sector, including but not limited to the following:-

• Debt levels
• Gross profit and net profit margins
• Key customers, staff, suppliers, IP
• Whether they rent or own their property
• Capex requirements
• Quality of management team

Valuing a business requires an examination of historic results, risks and opportunities for the business, examination of the key value drivers and ultimately to assess the sustainability of future profits and cashflows.   Key agreements should be assessed, shareholder agreements and the company’s Constitution.  Also required is an assessment of the sector and macro-economic factors, which often requires access to specialist databases. A potential purchaser or seller of a business should take professional advise in this area to better improve their assessment of value and to lessen execution risk in such a transaction.