So a simple (but ludicrous just to make a point) one would be square footage. We could say that the last 10 fish and chips shops that were sold went for £500 per square foot of their shop. So if your shop is 300 square feet, we would say your shop would sell for £150K. This is obviously much too crude so maybe we could next consider using revenue as the metric. The problem with revenue is that you can have one fish and chips shop on Oxford Street and one in the middle of nowhere, both doing £500K in revenue. Which one is the most valuable? Well, the one on Oxford Street is likely at a loss whereas the other one could be at a good profit due to drastically lower rents and staff costs so it would be more valuable as more after-tax cash would flow back into a Buyer's pocket. So revenue does not work that well in most cases. We could use operating profit before tax as a metric. The problem is that different people put very different things through the company, many of which have nothing to do with the operations of the company. We notionally call these Ferraris and Hawaiian holidays as a tagline. Also, people do different things with salary and dividends as well as taxes so it is difficult to find commonality with just the Operating Profit figure on the annual report alone. So the approach we take is to adjust this Operating Profit figure to calculate a number we call Normalised EBITDA (or NEBITDA). (EBITDA stands for earnings before Taxes, Interest, Depreciation and Amortisation).
The basic calculation is Normalised EBITDA * a Multiple.
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