It takes a lot of work to value a small business. It also takes a lot of digging to find private transaction information. In a perfect world, you would have access to your competitors’ business financials and all of the merger and acquistion transactions in your industry. Unfortunately, private data is very hard to find. Here, we’ll cover how to calculate EBITDA, find private transaction data, how to use public company data, and how to compute a simple valuation for your small business. You should realize that a comprehensive valuation for your business would include many different valuation techniques including cash flow analysis, recapitalization scenarios, and using many more metrics than just EBITDA. Take the information learned from this analysis as a starting point.
How to calculate your EBITDA
Start by taking your previous 12 months of financial statements. EBITDA stands for earnings before interest, taxes, depreciation and amortization. If you’re familiar with your financial statements this is pretty easy to calculate. If not, we’ll walk you through the basics, since you’ll need to know how to get EBITDA data for public companies later on.
Start with the income statements and find operating income, or income from operations. Find out if there is interest expense included in the operating income (sometimes it is broken out below operating income). If there is, add it back to operating income. This will give you your EBIT figure. Now, visit the cash flow statement and, under operating activities there will be a line that says depreciation and amortization. It may include a few other items or it may only include depreciation. Since these are non-cash expenses, we also add them to our EBIT figure to arrive at EBITDA.
Now do this for the last four quarters of business and add them together. You’ll also want to exclude any one-time charges or discontinued operations that may have been included in operating income. If a company doesn’t have a detailed quarterly cash flow statement for their fourth quarter, you’ll need to start with the annual figure, add in the most recent quarters since, and then subtract the matching quarters from the year before.
When you’re done, you should have an annual EBITDA figure. You’ll need this later on.
How to find private comparable transaction data
If you are in an industry with lots of mergers and acquisitions, you may be able to find some private transaction data that can help you find out what comparable companies sold for relative to their EBITDA. The best place to look for this data in companies SEC filings. Specifically in the 8-K forms that detail mergers. Also, there will be footnotes in the annual and quarterly reports that might break out all, some or a small amount of data. Any information is better than none. Feel free to make educated guesses or estimates with the information you find.
For example, if a competitor was bought by a public company and the company disclosed that they acquired $10 million in sales and that they paid $4 million, then make some assumptions. For example, if your EBITDA margin (EBITDA / Sales) is 10%, let’s assume their EBITDA is 10%. You could estimate that they had $1 million in EBITDA (10% times the $10 million in sales). With this estimate, you could assume that the competitor was bought for 4 times EBITDA (paid $4 million / $1 million EBITDA estimate).
There are also services that compile private transaction data. It will usually cost you to search them. If you are having trouble finding private data specific to your industry. Look for transactions for similar companies in other industries that have something in common with your company.
Press releases are another source. Sometimes, if a private company is bought by another private company, they will issue a press release. Often, there are a few financial details released. Find any that you can and use estimates to assign EBITDA multiples to the sales. Keep all of your work in a spreadsheet so that you’ll have it handy for your valuation.
The final way to find private transaction data is to ask for it. Contact a company that made a recent acquisition. Tell them that you are a similar company and you are curious as to what range of multiples a company like yours is worth. You’d be surprised as how willing to help some people will be. After all, maybe they’ll be interested in your company someday. Also, you can call or talk to an investment banker if your company is worth more than a million dollars. Otherwise, look for a local business broker. They should be able to give you some guidance on ballpark figures to use for your valuation.
How to find public valuation metrics
If there isn’t much private information available, its always easy to find public EBITDA information. Gather a list of public companies that are in the same field as your company. List them in a spreadsheet and calculate their last twelve months of EBITDA.
Next, calculate the EV, or enterprise value of each public company. This is the total value of the company, including both equity and debt. To calculate, take their market cap (shares outstanding times stock price) and add in their net debt (total LT debt minus cash).
In the next column in your spreadsheet, calculate EV / EBITDA. This will show you the multiple of EBITDA that each company is trading for. Remember that public companies are larger and, because they are liquid, trade at much higher premiums than small private businesses.
How to derive a basic value for your small business
You’ve already computed everything you need to get your inital estimate. Start with the private data as this is the most comparable data. Look at the EBITDA multiples and use your judgement to come up with a range of where you think your company fits in. If you have a lot of data, you can look at averages, but there will always be big outliers so its important to use judgement.
Next, look at the public company EBITDA multiples. Look at the outliers and come up with a range of multiples. Before you apply this multiple to your company, you’ll want to discount the multiple by 30-60% to account for the difference in price between a public and private company and between a larger and smaller company.
Once you’ve got a range of multiples, apply them to your EBITDA figure. For example, if you’ve determined that comparable companies to yours sold for 4-6 times EBITDA, then multiply your EBITDA by 4 and then by 6. This is the initial range of your company’s valuation.
The next step is to keep the data you have and apply it to other metrics than EBITDA. Look at price to sales transaction data, discounted cash flow analysis, and, if you are thinking about selling, maybe even talk to a business appraiser, business broker, or small investment bank.