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Multiples

This is extremely important for a seller as its how your business is valued by a potential buyer!

Traditionally a company’s earnings is multiplied a number of times to determine its value. It’s represented as 3x, 4x, 8x, 12x.

When using adjusted net profit as the multiplier method, it is:

Adjusted Net Profit x Multiple (of industry) = Valuation

The multiples of earnings approach is usually the preferred method of valuation of a lot of SMEs. However, it could be based on number of end users and a cost of acquisition for each. eg. 2 million customers x £20 = £40m !

When valuing such businesses, multiples could be applied to adjusted net profit, earnings before interest and taxes (EBIT / EBITDA) to determine sale price. However, in lieu of adjusted net profit, a multiple can be applied to cash flow or even gross margin.

It all depends on how the buyer values your business.