Multiples of earnings – The “multiple earnings” approach uses an established market based Price/Earnings (P/E) Ratio (also known as PER) and is suitable for those businesses with a record of profit generation. It involves multiplying adjusted after tax profit by an industry sector related multiplier. In order to arrive at a meaningful post-tax profit figure, it will be necessary for certain adjustments to be made, which are known as “Normalising Adjustments”. The Valuer will need to scrutinise the accounts in order to establish if there were any income or expense items that were considered to be either of an extraordinary or non-recurring nature, or higher or lower than would be reasonably expected, in order to calculate maintainable profits. The normalising adjustments will be similar to those used with the EBITDA method below. Very often, the multiplier will be linked to quoted Companies listed in the Financial Times FTSE 100, 250 and AIM markets delivering broadly similar services to the business being valued but with a discount of between 30% to 70% applied for a non-quoted Company, usually depending on level of risk and transactional values for similar businesses sold. NB For smaller businesses, a more basic approach may used by some Valuers using a much lower multiple but based on PBT.
Earnings Before Interest, Tax, Depreciation & Amortisation (EBITDA) –