Whenever a business owner is considering a sale, the first question to an M&A advisor is usually “What is my business worth?” Doug Nix, Managing Director and Principal at CFA Toronto West, wrote an in-depth article explaining why the EBITDA multiple, one of the most common methods of valuing a business, may also be one of the most misunderstood. The article is a must read for anyone considering a sale or recapitalization.
Citing a real world example, Doug compares two EBITDA calculations and how each impacts the business valuation. Doug notes, “There is a striking and vast gap between the actual market value ($14,000,000) and the owner’s Expected Market Value ($20,950,000). One can easily see why many business owners have experienced great disappointment and have rejected a purchase offer at market value because of the distortion caused by using the Reported EBITDA multiples.”
I recommend reading the entire article.