Before You Start

This guide assumes a strong understanding of financial statements and financial modeling concepts. It’s designed for experienced accountants and firm owners.

Overview

60 min
Estimated Time
Expert
Difficulty
Ongoing
Analysis

What You’ll Learn

  • Core principles and methodologies of business valuation
  • Applying SDE, EBITDA multiples, and Discounted Cash Flow (DCF)
  • Analyzing value drivers and preparing for valuation engagements
  • Communicating valuation insights to clients effectively
  • Expanding your accounting firm’s advisory services

1. Foundational Concepts

Before diving into methods, ensure a grasp of these core areas:

Essential Knowledge Areas

  • Financial Statement Analysis (Income Statement, Balance Sheet, Cash Flow)
  • Understanding Value Drivers (Growth, Profitability, Risk)
  • Basic Economic Principles (Time Value of Money, Opportunity Cost)
  • Industry and Market Research

Recommended Skills

  • Advanced Excel Modeling
  • Risk Assessment and Mitigation
  • Communication and Presentation
  • Access to Industry Databases

2. Choosing Your Valuation Method

Selecting the right method depends on the client’s business, industry, and purpose of valuation.

Method A: Income Approach (e.g., Discounted Cash Flow - DCF)

Focuses on future earnings potential.

Pros:
  • Comprehensive, forward-looking.
  • Accounts for specific company risk.
  • Ideal for stable, growing businesses.
Cons:
  • Highly sensitive to assumptions.
  • Complex and time-consuming.
  • Less suitable for startups or volatile firms.

Method B: Market Approach (e.g., Multiples - SDE, EBITDA)

Compares the company to similar businesses recently sold.

Expert Tip: For small businesses, Seller’s Discretionary Earnings (SDE) multiples are often more appropriate than EBITDA multiples. SDE normalizes for owner compensation and non-essential owner expenses, giving a clearer picture for potential owner-operators.

3. Step-by-Step: Applying Multiples

This method offers a quick yet reliable valuation based on market comparables.

{
  "company_name": "Acme Widgets Inc.",
  "valuation_date": "2025-09-30",
  "financials": {
    "revenue_ttm": 1250000,
    "sde_ttm": 350000,
    "ebitda_ttm": 220000
  },
  "market_data": {
    "sde_multiple_range": [2.5, 3.5],
    "ebitda_multiple_range": [4.0, 6.0]
  },
  "calculated_value_sde_low": 875000,
  "calculated_value_sde_high": 1225000
}

4. Deep Dive: Discounted Cash Flow (DCF)

The DCF method requires projecting future free cash flows and discounting them back to the present.

  1. 1

    Project Free Cash Flows (FCF)

    Forecast revenue, expenses, working capital, and capital expenditures for 5-10 years.

  2. 2

    Estimate Terminal Value

    Calculate the value of cash flows beyond the projection period, typically using a perpetual growth model.

  3. 3

    Determine Discount Rate (WACC)

    Calculate the Weighted Average Cost of Capital (WACC) to discount future cash flows to their present value.

  4. 4

    Calculate Enterprise Value

    Sum the present value of projected FCFs and the present value of the Terminal Value.

Common Error: Over-optimistic Projections

Ensure your growth rates and profit margins are realistic and justifiable. Small changes in assumptions can drastically alter the final valuation.

5. Communicating Valuation Insights

Key Communication Checklist

  • Clearly explain the valuation purpose and scope
  • Transparently present all key assumptions and inputs
  • Discuss the range of valuation outcomes, not just a single number
  • Address client objectives and how the valuation impacts them
  • Highlight value drivers and potential areas for improvement

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