As discussed earlier, this is just one data point and we would need to take a view on other periods. Also, when preparing a Head of Terms, it is often helpful to just include language like 'Normalised EBITDA to be agreed by both parties and then specify a multiple. This allows the accountants to have more data and more time to come to a conclusion during the due diligence process. However, all parties will want some kind of estimate of what Enterprise Value will be so although the Heads of Terms may specify a formula, a working Normalised EBITDA number will generally be needed for conversation so an overall deal value can be estimated before the parties are willing to move forward. As always, there are many nuances to this and every transaction is different, but we will be happy to help work through this with you.
Key Factors That Affect Value
There are many factors that affect the value of a business. Some are subjective, some are objective. One of the most important things to understand is that the main mathematical premise is that a Buyer is purchasing future cash flow so the level of confidence they have in the business's ability to produce that future cash flow will determine the level of risk they associate with the business which will, in turn, affect the valuation equation and the multiple given is driven by risk. A Buyer should also assess how easy it will be for them to take over the business, how well it fits into their portfolio, cultural fit, geography relative to where they live or the location of their other businesses as well as whether they like the business or not at a personal level.
Main Areas a Buyer Should Look at That May Affect Value:
Good Books and Records – Demonstrates the company is well run and they can rely on the financial data being disclosed.
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