Business Acquisition Protocol
and Business Valuation Matrix
by: Theodore P. Burbank, FIBBA
Transaction structure and financial requirements will vary depending upon the size and
type company involved. Businesses can be divided into four classes. Definition
of Earnings, usual Price/Earnings ratios and Terms of Sale vary by classification.
Usually Public or very large private companies.
Measured in Millions
Earnings Definition: After Tax Earnings
Price/Earnings Ratio: 10x to OMG*
Usual Terms: Cash or
* Oh my GOD!
Generally Private companies with well defined Corporate structure.
$500K to Low Millions
Earnings Definition: EBIT , EBIT-D, EBIT-DA to After Tax
Price/Earnings Ratio: 3x to 15x
Down Payment: Equity of 1 to 2x
Earnings to all Cash
Bank note(s) and owner financing
Companies that represent a "Strategic Fit" usually will be valued and sold using
"Wall Street" protocol. When a strategic reason for purchase is lacking,
"Upper Main Street" methods are generally employed.
Private companies with Corporate structure developing. Owner has delegated many
functions to others.
Usually under $500K
Earnings Definition: Adjusted EBIT or EBIT-DA,
Sometimes EBIT and EBIT-D are used
Price/Earnings Ratio: 3x to 7x
Down Payment: Equity of 1 to 2x
Owner financing - limited bank involvement
Commonly referred to as "Mom and Pop" businesses. Owner wears "all the
Usually under $150K
Earnings Definition: Discretionary Earnings
Price/Earnings Ratio: 1x to 4x
Down Payment: 80% to 120% of
Owner financing - Bank financing is rare
EBIT = Earnings Before Interest and Taxes
EBITD = Above plus Depreciation
EBIT-DA = Above plus non-recurring and discretionary expenses
Discretionary Earnings = EBIT-DA plus Owner's Compensation
Note: Down payments or equity investments may exceed the levels indicated when
inventories and other current asset values are high.
This article has been condensed from "The
Complete Guide to Business Valuation when Buying or Selling a Private Company"
Burbank is President of Lighthouse
Financial, LLC and Parker-Nelson
Publishing. Since 1979 he
and his associates have participated in more than 2,000 business transfers.
He is the author of seven books and six software programs relating to
Finding, Investigating, Valuing, Financing, Buying, and Selling a Private
business. A pioneer in the practice of business sales and valuation, Ted is
recognized nationally as an authority on the subjects.
developed a “Business Selling System” which, over fifteen years, has proven
to increase the probability of a successful business sale by as much as 400%
over the results produced by business owners or typical business brokers.* His
latest work is his book “Wealth Building Exit Strategies for Owners of Private Companies.”
has recently established a nationwide network of brokers and intermediaries who
follow his Business Selling System principles as the “Business and Franchise
has conducted seminars on business sale and succession issues for trade and
professional organizations in this country, Canada and abroad. Ted is
available for private assignments and consultation.
He may be reached by telephone: 508 794-1200 or by email: email@example.com