Broker using projected earnings for valuation

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by a searcher from Duke University - The Fuqua School of Business
in Atlanta, GA, USA

2yrs ago

Broker using projected earnings for valuation

I'm currently evaluating a deal where SDE grew by 84% inredactedI've based my valuation on 4 year average SDE, which provided a much lower value than what the seller is asking. The broker told me the asking price is based on a 4 year average SDE that includes 3 prior years and projected SDE for this year, which is 7% higher thanredactedI am not yet convinced the 2023 pop in earnings is sustainable, so including a projection based on this number seems pretty optimistic.

Am I off base thinking that using projected earnings is too aggressive, especially when the projection is based on 1 year where earnings jumped so significantly. Is this just a normal practice brokers use to juice EV?

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reply by a searcher 1yr ago
from Liberty University in Rochester, NY, USA

Lenders don’t care about future projections so if you’re financing it is past performance only. You could always explore this projected performance with the seller - I always like to figure out if there is some reason for this. I don’t know many business owners looking to sell a business that’s growing that quickly without some other strong motivating factors :)

reply by a searcher 1yr ago
in Atherton, CA, USA

Projections are for selling company and gaining interest in asset. If broker has told the owner a extremely high price ask: How long has this company been on the market? How long has the owner been looking for sale? How old is the seller? Focus on what you can do to close deals quickly not the broker and just move on.