In this training, we explore a comprehensive valuation model designed to evaluate businesses for acquisition. Starting with adjusted EBITDA and liquidation value, the process includes determining market multiples from DealStream, analyzing transfer value through four pillars—customer, employee, structural, and social goodwill—and factoring in seller psychology with MUD and RF scores to adjust the valuation accordingly.

An example is given with a marketing agency to illustrate the methodology. The agency, initially valued at $1.213 million with $400,000 liquidation value and high customer goodwill, achieved a transfer value score of 62.5%, positioning it within an industry-average multiple range. Seller psychology then applied a discount, reducing the valuation close to $1 million.

Different deal structures, such as leveraged buyouts (LBO), SBA deals, and annuity-based transactions, are analyzed to show how variations in payment terms affect the final valuation. For instance, an LBO typically has a lower valuation multiple than an annuity-based approach due to upfront payment adjustments.

A model designed for users allows input of multiple factors, such as revenue, EBITDA, balance sheet assets, and liability data, to calculate equity and liquidation values. The tool integrates transfer value assessments and can suggest fair pricing for deals based on specific scores across key metrics.

This model emphasizes that valuations aren’t solely about financial figures. Incorporating transfer value, seller psychology, and strategic deal structure allows a nuanced approach to acquisition decisions, enhancing decision-making for business buyers.

Full Transcript:

So first thing you do, if you calculate that adjusted EBITDA average, and your liquidation value, I’ll show you the process, then we’ll do an example.

Second is you determine the market multiple from DealStream. Number three, do the transfer analysis. Look at the employee customer structural and social goodwill and the value.

Then you can analyze the seller psychology, calculate the MUD scores and the RF scores, and then you can look at how the deal structure, that you’re proposing is gonna adjust the valuation. So let’s look at the business that we originally, went through.

So, again, it’s two million dollars in revenues, three hundred thousand dollars of EBITDA.

We looked at the average. We took the, three year average because of an uptrend, three five five.

And then we looked at the liquidation value being worth about four hundred thousand dollars.

Then we went back to DealStream.

Now this is a marketing agency, for example. Is it a marketing agency? Yeah. It’s a marketing agency.

So we know that on average, it’s gonna have, like, a three point six x multiple of adjusted EBITDA.

And then let’s look at the, let let’s look at the transfer value. So let’s say it was a five for customer, a four for employee, a three for structural, and a three for social. So it’s below average on structural capital and social capital. It’s above average on employee, but really good strong, customer capital. So that’s giving us a sixty two point five percent transfer value score, which is fifteen out of twenty four. And that places the business right bang in this industry average multiple rates. So in this in this example, this is a a a very similar business to what I’m looking at inside of of KOD.

You wouldn’t make any adjustment in valuation based on the transfer by. But when I show you the model in a minute that I’ve built for you that I’m still testing, you’ll see by changing some of these scores, it can drive that business down into that liquidation value only. So so if you’re worried about transfer value, you can score it, and then you can see how the valuation is gonna change. K?

So we have the three fifty five of recasted EBITDA, three point six times multiple, which we got from DealStream. So now we’ve got an enterprise value of just under one point three million, the same adjustments that we made before. So now the equity value of this deal is one point two one three million. It’s gone up from the original analysis because we’re using that three point six multiple.

So that’s the financial valuation. Now let’s look at the, the rest of the analysis. So one point two one three is the new valuation. Four hundred thousand is liquidation value.

So now we’ve got eight hundred and thirteen thousand dollars of goodwill. And the goodwill is distributed across the four pillars in that way. So most of that value, a lot of that value is coming from the customer because that’s scored really high on the transfer scale. Next was employee and then a little bit scattered across structural and social.

We look at the RF scores. We were at seventy three percent on the MUD score, which was high, eight to two point five percent on the RF score, which was really, really high. So seventy eight percent was the average.

We overlay that onto the model, and I’ve built the model for you so you don’t have to do it. That puts us kind of at the lower end of that range. So we’re at about two point eight x as it would hit the algorithm in my model. So that would imply about a sixteen percent discount to the original valuation.

So one point two one three was the new valuation, But because the seller psychology is on the high side, we’re gonna get a discount based on the mathematical modeling of all the other deals, that I have done. So that’s bringing the valuation back down to somewhere around the million dollar mark. Then Then when we apply the deal structure, that million dollar valuation is now what’s gonna sit in the midpoint of our structure curve. If we were to do an SBA deal, we would venture much lower down to, the lower multiple scale.

Because remember, the more that we pay on closing, the less the total valuation.

So if we were gonna be paying on average a three point two two x multiple for an LBO, We’re gonna be paying just under two and a half times if we’re doing an SBA. And then if we’re doing an annuity deal, it’s going the other way. So an annuity deal would be a higher valuation. It would be close to one point three million and slightly above a four x multiple.

So this is a summary. We know that our base valuation was one point two one three. That was driven by the math and by the deal stream multiple.

We know that gave us about eight hundred and thirteen thousand dollars of goodwill and four hundred thousand dollars of liquidation value. We applied the customer employee structural and social pillars.

That actually didn’t change the valuation because we’re in that average zone at sixty two and a half percent, so no change. We then looked at seller psychology. That was really high at seventy eight percent. So that gave us a discount and brought the valuation back down to close to a million bucks. And then when we looked at the three structures, the one point zero two four would be the LBO model, seven eight five would be your SBA valuation, and one point two nine seven would be your valuation if you were gonna have no closing payment and you were gonna go down the straight ten year annuity.

So what I’ve done, guys we’ll take some questions a minute. What I’ve done, and I’m still testing it, is I’ve built you a model.

I built you a model so you can do this. You can put your three years of revenue and just an EBITDA in there, put your market multiple in from DealStream, take the cash, real estate, and, long term liability straight out of the balance sheet.

You can put your balance sheet net asset value, in there, and it calculates the liquidation. Right? These are different numbers, the one I’ve just showed you. I’m playing with this model.

So it calculates the equity value for you. It then looks at transfer value. So in this example, best in class business scored five out of six for customer, six for employee, five out of six for structural, five out of six for social, eighty seven point five percent. And remember, the model tells you what the premium’s gonna be.

So it’s doubling the transfer value because it’s got all these amazing things going on. If you drop this down and say, well, customer was a two, maybe employee was a three, now it’s only at market value.

Structure was a two.

Now it’s discounted. It’s getting lower and lower to, liquidation value.

Look at this. We only scored nine out of twenty four. We only have a thirty seven point five percent liquidation, sorry, transfer value now. So we’re at liquidation only value. The model’s telling you, guys, don’t pay any more than three hundred and twenty grand to buy this business unless you’re doing an annuity. You can put in the MUD scores, the RLEV scores.

So, that’s gonna apply an even bigger discount. This is gonna knock about, seven percent off the price based on where the seller psychology ranks in terms of that model. And then it calculates what the three valuations are for you and then summarizes them all there with the valuation and the deal structures and the amount of closing payments. So I’m gonna have another little play with this.

I only built this today, and I wanna battle test it for you. But, hopefully, I’ll get this out for you in the next few days. So, loads of crazy numbers in there, loads of crazy stuff, but I hope you found that, useful. And even if you don’t apply all of this when you’re doing your deals, I just wanted to kind of show you that valuation isn’t only about numbers.

You can think about deal structure. You can think about seller psychology, and you can think about the transfer value of a business and how that can drive the valuation up. Or if it’s a terrible business, how it can kill it based on those four pillars that we talked about. So thanks, guys.