When it comes to the companies they have built, it is difficult for entrepreneurs to look at them from a potential buyer’s perspective. If you have questions about how to sell your business, some rules can help you eliminate subjective assessments.
The easiest way to evaluate your company is to multiply a relevant indicator (EBITDA – earnings before interest, taxes, depreciation, and amortization) by a multiple specific to the company’s market. The calculation is simple to do, but it can generate results different from those with which potential buyers operate, whose valuation method is somewhat more complicated, known as discounted cash flows (DCF). Based on these calculations, a buyer interested in a business tries to determine its ability to generate income in the medium and long term. In other words, how much money the company could bring.
The multiples method also has several weaknesses that must be taken into account. To obtain a relevant multiple, an entrepreneur must identify, on the market, a company similar to the one they own. And more specifically, a company that has been involved in a transaction. Often, such examples do not exist. The time factor is another obstacle. The market may change, and if the transaction took place a few years ago, the multiple might no longer be relevant.