Calculating Intrinsic Value of a Small Business

[Forza]

I am unsure of how to calculate intrinsic value. Would someone who knows how to estimate intrinsic value give their estimate based on these figures for a small, privately owned business?

Usual price to (EBITDA) earnings ratio - 2.5:1 - 3.5:1
Revenue - $1,000,000
EBITDA Net Profit - $200,000
Current long term liabilities - $3,000
Book value of assets - $50,000


Wouldn't it make sense to calculate using after tax earnings?

 

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[Hoop]

Because everyones tax situation is different, evaluating the business before taxes levels the playing field.

You say that the usual value of the biz is 2.5-3.5 EBITDA...are you sure of this? Is it really true of the industry? If it is, then there is your answer. Or do businesses in this field set value on Revenue? Book Value?

Assuming your range is correct around EBITDA, does the biz have a strategic advantage? A strong brand or name recognition? If yes, your probably closer to the 3.5X.

 

[Analyzer]

To me it would make sense to look at the EBITDA in two ways.

First, how much EBITDA the company has and second how stable is that EBITDA (is it going to change dramatically? if so is it going up or down). To me that's the most important assumption you'll need to make, you don't want to pay for earnings that won't be there in the short term.

I think book value is less important unless you are considering a distressed company (whose assets you might need to sell) or if their assets are significant and very liquid (if the company is holding a lot of inventory or cash, etc.)

Looking at your numbers it seems you are looking to a very asset light industry (generating $1M of revenue and $200k of revenues on $50k of assets) so unless the EBITDA is very volatile (lots of competition, etc) it might be justifiable that the valuation is higher than the numbers you mentioned.

At 2,5 times EBITDA you would pay $500k for the company.

Amortization, depreciation and interest are probably low (the company is not very leveraged and the asset base is small) so you should be able to repay your investment in ~3 years, after that everything you made would be a profit.

The more academic way to value it would be discounting the expected future cashflows with a discount rate that makes sense for this situation.