"What's he want for it?" asks Darryl in The Castle whenever he hears of someone selling odds and sods. Darryl is the "Aussie battler" father figure in this 1997 hit Australian comedy film. On hearing the numbers his stock response is: "Tell him he's dreaming."

Darryl is valuing odds and sods. To price or value a business the more useful question is "What's it worth?" It's a common question when someone wants to sell, buy, lease, license, borrow, lend, attract equity capital, partner, outsource or carry out numerous other legal transactions. There is rarely a stock answer.  

The topic of valuation is taken up by two lawyers in our firm this month in practical articles in the Library section of this Website.  The first article is by Daniel Dwyer and is titled 51 hints to achieve your premium business sale price.

The second article is by Anton Joseph. Anton is a specialist in taxation and corporations law. His article is: Business valuation with EBIT multiples.

Anton's paper includes a very pertinent Australian case study on valuation using EBIT multiples. It concerns the mid-2006 move to takeover VeCommerce Ltd. The case study is instructive given the people involved. I'll note two in particular. The chairman of VeCommerce Ltd is Christopher C. Golis. Golis is a prominent name in Australia's venture capital industry and author of the leading text in the field titled Enterprise and Venture Capital - A Business Builders' and Investors' Handbook (Allen & Unwin, 4th edition, April 2002). The valuation is by Lonergan Edwards Associates Ltd. Wayne Lonergan, a principal of that firm specialising in business valuations is also an author. His books include The Valuation of Businesses, Shares and other Equity (Allen & Unwin, 4th edition, 2003).

On reading Anton's paper I thought it useful to compile a rough guide to EBIT multiples.   I'd be interested to read comments if you wish to question, add to or improve on the following rough guide.

     As a rough guide, expect high EBIT multiples (say 8.0 and above) where there is: 

• stockmarket takeovers at valuations which have an established upward trend  

     As a rough guide, expect mid-range EBIT multiples (say 5.0 to 8.0) where there is:

• high turnover or profitability;
• a business is almost capable of being listed;
• depth of management;
• strong tangible net assets position;
  
• recognised products and services; or
  
• national presence or exporting revenues. 

     As a rough guide, expect low EBIT multiples (say 5.0 and below) where there is:

• low turnover and profitability;
• dependence on the presence of existing owners;
• poor tangible net assets position; or
  
• dependence on specific positioning in a leased premises.

Daniel's and Anton's articles indicate the many benefits of having in advance an understanding and position on valuation before entering into negotiations. At the very least you can then avoid a pregnant pause or severe embarrassment if anyone at the negotiation table blurts: "You're dreaming."