Business valuations are typically done through a multiple of a company’s EBITDA (earnings before interest, taxes, depreciation and amortization). The multiple is based on an industry average and recent merger and acquisition data. Typically technology multiples could be in the 10-15x EBITDA range. However, this approach should be used only as an average with a number of other formulas for determining a true metric for a startup’s value. The inherent problem with using only EBITDA for business valuation is the neglect to a startup’s balance sheet. Fair market value of assets may not be accurately portrayed on the balance sheet. A piece of equipment or property purchase three years ago may have a 40% premium to present day book value on the balance sheet. EBITDA certainly would not account for this. Intangible assets, management practices and goodwill is another factor EBITDA ignores.
For example the recent nose-bleed valuation of Facebook at $15 billion is certainly using much more than EBITDA to come up with that valuation. Facebook’s current gross revenue (lets say this closely resembles EBITDA) is speculated to be around $150 million. This would generate a multiple of 100x. The staggering figure is placing a lot of weight on intangible assets and goodwill like 40 million registered users, tremendous upside in advertising revenue, limitless possibilities in new paid services and a recognized brand name in social networking. These “possibilities” are where hype and valuations become gray.
Other factors to help you determine your business’s worth would be discounted cash flow analysis and running a full set of financial ratios on the audited financial statements.