Large Business valuations are somewhat different from the valuation of smaller businesses. Valuations of large businesses involve different valuation methods than those utilised in SME valuations and micro business valuations.
The valuation of smaller businesses typically involves adding back the wage paid to the working owner to achieve a PEBITDA profit, which is described as:
(proprietors’ earnings before interest tax depreciation and amortisation).
In the case of larger businesses the large business valuation method usually involves one of three methods;
1. EBIT (earnings before interest and tax)
2. EBITDA (earnings before interest, tax, depreciation and amortisation) or
3. NPAT (nett profit after tax)
All three methods are based on an under-management profit where the key man’s labour is valued as an expense to the business. This is the profit a corporate buyer will need to establish before applying a price-earnings multiple to the profit.
Where a public company is considering acquiring a large privately held business, the valuation of the large business will usually entail a valuation to support the recommendation to the board and a large business valuation may also be required to support a finance facility.
The public company or private equity firm will usually proceed to present a “Term Sheet” or a “Heads of Agreement” which is basically an intention to acquire but subject to a large business valuation or subject to an intensive due diligence process that is effectively a large business valuation conducted by the buyer’s advisory firm.
There are many pitfalls for both buyer and seller and the legal and accounting costs can run between ten thousand and one hundred thousand dollars in some cases in a sale of a large privately held business to a public company or private equity firm.
