At the end of the day, the key factor that the investor will focus on is predictable future growth culminating in predictable future earnings. Company valuations may diff er from industry to industry. Various valuation methods are highlighted in the table in Figure 11.2, but the details of each of these are beyond the scope of this book. The WinWin Deal 223 To give you an idea, here is a quick break down of two more popular valuation measures used that are used. • Multiple of EBITDA • Discounted Cash Flow (DCF) You may have heard EBITDA being used as a valuation and worry that the value of your business should not come down to one number. Value does not, but there has to be a starting point. Figure 11.3 explains the EBITDA formula. Figure 11.2: Different Industries Have Differing Valuation Methods Adjusted Book Value Industry Comparable Asset Valuation Multiple of Earnings Capitalization of Income Multiple of EBITDA Capitalized Earnings Multiple of Cash Flow Cash Flow Method Multiplier or Market Value Replacement Cost Rule of Thumb Methods Discounted Cash Flow Tangible Assets Excess Earnings Method Value of Intangible Assets FORMULA: NORMALIZED EBITDA TIMES MULTIPLE LESS NET DEBT 1. EBITDA > calculate EBITDA on a “normalized” basis, which means removing any abnormal items not directly related to the operation of your business. These include bonuses above market average, salaries paid to family, irregular costs such as equipment writeoffs, adjustments due to corporate tax management. 2. Multiple > standard private equity EBITDA multiple is “six times.” This multiple is often adjusted, however, for different industries. A quick analysis of recent deals usually provides an indication of multiples. 3. Net Debt Total debt minus cash Figure 11.3: EBITDA Multiple Valuation 224 CHAPTER 11 Th e DCF method compares the discounted revenue multiple of your company to similar publicly traded companies. In other words, the fund will fi nd a company in your industry that is already listed on the stock market to compare to your projections and check if your assumptions are fair. Th is method is used for a company with existing revenues and credible projections. Th e value of the company is then determined as a multiple of the current year’s revenue. Your last full fi nancial year is very important, as this is what will determine your value. So if you have had a lean year due to a death in the family or something unusual, put off valuation and get a full year with good revenues. Th is multiple of your current year’s revenues is then compared to similar publicly listed companies and is then discounted by around 30% to 40%. Th e discount applied is the lack of a track record and the lack of liquidity. Th e DCF analysis is used for a company with credible revenue projections. Th e value of the company is the cash it generates. However, the DCF method is only as good as its input assumptions, namely: • free cash fl ow forecasts, • discount rates, and • perpetuity growth rates.