It is not unusual to see businesses for sale after having a huge jump in profits the prior year. If this is the case, you need to think about how sustainable the jump in earnings is. If earnings are erratic, then erratic earnings suggest higher risk, which make the company worth less. Although I emphasize that every business situation is different, and that exogenous factors such as what is going on the stock market and the outlook for the economy as a whole can have an impact, I am going to stick my neck out and offer some simple business valuation guidelines.
Finally, these multiples are based on pretax profits. For larger small businesses, such as middle-market companies with sales of several million dollars up to several hundred million dollars, valuation may be more commonly thought of in terms of a multiple of EBITDA earnings before interest, taxes, depreciation, and amortization.
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