Business valuation = (Profit/EBITDA/SDE) X an industry multiple.
There are two ways to determine revenue. One way is EBITDA. EBITDA is an acronym for Earnings Before Interest, Taxes, Depreciation, and Amortization. In other words, it measures exactly how much money a business made without considering expenses.
Some businesses do not have depreciation and amortization because they do not have physical assets. In that case, use another revenue metric called SDE. SDE is an acronym for Sellers Discretionary Earnings. This is a metric of what the seller has left over after expenses, and it is the most common valuation for small businesses.
EBITDA and SDE are both net profit. Say Yes! Enterprises uses one to three years of financial data to determine both of these numbers. The length of financial data depends on the investor’s preferences. SYE believes that recent data is the most relevant. Three years of financial data are considered to identify trends, but an offer is typically made on the last twelve months of data.
Next, multiply the profit metric (EBITDA or SDE) by an industry multiple. There are public charts that determine multiples for every type of business in the industry.