A simple valuation model

A valuation model for a small online business does not need to be complicated. It needs a defensible earnings figure, a multiple that can be justified, and an honest list of adjustments.

The three steps

1. Normalise earningsRemove costs that will not continue and add back what a single owner takes out. Every adjustment needs a line in the accounts behind it.
2. Apply a multipleDrawn from comparable transactions, adjusted for size, stability, concentration and owner dependence.
3. Adjust to a priceAdd cash, deduct debt, correct for the working capital level that will be left in the business.

Sensitivity

A model with one number invites false confidence. Running three scenarios, with a conservative, a base and an optimistic multiple, shows the width of the realistic range, and that range is what a negotiation is actually about.

What the model cannot capture

Strategic value. A buyer for whom the business closes a gap in their own range may pay above any modelled figure, and no formula predicts which buyer that will be.

Equally, no model rescues a business whose earnings cannot be reconciled to bank statements. Reconciliation comes before valuation, not after.

Second opinion

A structured valuation prepared by a party with access to transaction data is available at (https://www.businessforsale.eu/services/business-valuation).