Business valuation based on average of last 3 years

searcher profile

November 25, 2021

by a searcher in Chicago, IL, USA

Hi all,

I would like your thoughts and experiences with a valuation. I'm currently looking at a business that acheieved the following EBITDA:

2018 600k
2019 $1.3MIL
2020 $2.3MIL
2021 $2.3MIL (Dec is forecast)

Would you average 2019, 2020 and 2021 to get the EBITDA or are the last two years consistent enough to use $2.3MIL as the EBITDA?

I am asking myself "how would the banks value this"? Thank you in advance for your help.

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commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
What are the "drivers" for the EBITDA growth? Value is a function of future cash flow. To project future, one needs to understand the past.
Few questions they come to mind are a) is this a project dependent business? What if the projects similar to last few years will not continue? (Example: During Y2K, many companies had few great years that did not continue. What if the growth is due to a new product line or a patent or a geographic expansion? If so, the future EBITDA may be bigger than than of last few years.
I represent sellers. Before I take on an engagement, I spend serious amount of time understanding the "drivers". I will use average, or last year or TTM EBITDA depending on what the "drivers" are.
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Reply by a professional
from University of Southern California in North Palm Beach, FL, USA
Beware of goodwill, especially if its basis is the owner’s personal relationship with the company’s C.E.L.B.S. ™. To what degree can you reasonably expect to match or surpass the quality of the seller’s business relationships with the company’s customers, employees, landlord, bank and suppliers? (The IRS defines goodwill as the difference between the selling price of a business and the value of the tangible assets buyers purchase.)

Above covered more in my book: How to Buy the Right Business the Right Way https://www.amazon.com/dp/###-###-####
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