Having trouble agreeing on a sales price. Business has been under current ownership for almost 10 years. First 9 there was no profit, year 10 the business is profitable. Seller feels ebitda based on last 3 years should be 5X. Anyone with experience here weigh in? Owner is also still hands on. Thanks. Pretty new to this.
If the recent profitability is expected to be sustainable, I would argue a multiple based on 1 year sales would be best. Question is what multiple.
Often for a company that is growing (or has just flipped from loss to profit), the multiple is based on the next 3-5 years EBITDA not the last 3 years EBITDA.
The reason is that any price calculation is ultimately a way of calculating a lump sum in exchange for future cash flows.
This is why even unprofitable companies (with expectations of future profit) have a value greater than zero.
Then the question of what multiple is appropriate depends on all the usual things like competition, expected growth, etc.