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  • Leonard Brecken

What Goes Into Business Valuations?

The Answer? Alot of things, but primarily past profits & future profits. There are many indirect measures of business valuations the prime ones generically are Market Cap/Sales, Market Cap/EBITDA (earnings before interest, taxes, depreciation & amortization), Market Cap/ EBIT and Market Cap/Net Profit. All are tools (and there are many others) used to determine from the buyers point of view what they are willing to pay for a company. Most importantly, both past and future data are used. Past metrics are important for sure, but as the saying goes "past results aren't an indicator of future results". Thus, normally a financial model/forecast is created from both the sellers point of view and buyers point of view to create a profit outlook for the company. Often this is done by a CPA which isn't trained to look at a business not as an investor would, but instead thru an accounting/tax lense. That's not to say CPAs aren't an integral part of valuing a company, but all I'm saying they are focused & trained to see different things thus analyze things differently vs investors would. For example, like actual observation of how a company runs, interviewing executive to conduct due diligence or just how firm specific or economic risk gets factored into valuations. As a result, "profit elements" are missed and thus profit inefficiencies are created ultimately negatively impacting the valuations from the selling owners point of view, but creating opportunities from the buyers point of view. I should also note that there are intangibles too that matter in valuations such as brand recognition & synergies of the selling company when combined with the buyer company that must be considered. The seller must be aware of these intangibles or risk underselling the company to the buyer.

Here at CCS we get involved with Profit Management early (preferably years early as it may take that long to correct) to address "profit inefficiencies" that exist so they can be corrected in the right way vs hiring a consultant to fix a very specific issue out of context of broader picture. Often a problem is patched solving only the result of the problem and the root cause of the problem. In effect, using a boat analogy, we don't patch the hole in the boat, but refurbish the entire boat then set it on the right course in context with broader strategy/goals in mind. Further, we correct problems in context of improving valuations which we are uniquely qualified to do given 25 years of institutional investing.

Contact us to see how we install the financial controls to monitor, measure and analyze profitability to maximize it & valuations. To gain from our unique investor perspectives on valuation please contact us or sign up for email updates via

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