With all due respect to people who sell software and tools to do business valuations, it is all rubbish. Small company valuations ought to be simple and should rely only on the few selected metrics.

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I am astonished at how sophisticated valuation techniques could be but still miss the boat. Actually I did previously subscribe to many of the techniques, the DCF method, IRS method, the Capex method it Value method, the revenue method. I used to run several types of valuations for every deal. I used to create printed valuation books to provide to our target companies. It was highly impressive but useless. The valuations were always tossed out at the start of the procedure.

To begin with they overcomplicated everything. Sellers do not actually want to need to understand overcomplicated valuations, anything that increases the complexity just hurts your chances of getting to a deal.

I gave up valuing companies using sophisticated techniques in favor of the simple multiple of earnings before taxes, interest and depreciation (EBITDA). I will often use the same multiple of earnings approach for every business and arrive at a precise valuation in 1 minute or less. 3 to 5 times EBITDA. The valuation often must be adjusted for a number of key factors but as a business buyer you are able to safely make a deal within as well as outside this selection of values.

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Now here's the interesting part. Basically have valued the company at Three times EBITDA I may just offer the seller 2 times EBITDA. There is no law saying you are offering exactly what the clients are worth. It follows that the valuation may bear only a passing resemblance to the ultimate transaction price too. So not place too much stock in valuations when purchasing a company. Do the multiple method for a great minute and then refine the cost along the way based on the facts that arise during the deal process.