Multiple of Discretionary Earnings

Income-based Business Valuation Method

Definition

A key income-based small business valuation method that establishes the business value as a multiple of an economic benefit adjusted for net working capital, non-operating assets and long-term business liabilities.

What It Means

Multiple of Discretionary Earnings method establishes the business value by multiplying the seller’s discretionary cash flow by a composite valuation multiple which is derived from a number of business, industry, market, and owner preferences factors.

The method is especially well suited for valuing owner/operator managed businesses whose purchase is driven by both economic and lifestyle considerations.

Valuation multiple defined by business performance factors

Some key factors that are accounted for by the Multiple of Discretionary Earnings valuation method include:

  • Business earnings historic track record.
  • Industry and business growth prospects.
  • Acquisition financing terms.
  • Competitive pressures.
  • Business position in the market place.
  • Risks associated with market and customer concentration.
  • Location and facilities.
  • Quality of management and staff.
  • Ease of operation which makes transition to new ownership feasible.
  • Overall business desirability.

See Also