5x EBITDA? The story behind the numbers
Why a good business valuation starts with the story behind the numbers, not with 5x EBITDA.
Blood, sweat, and tears. Fifteen years of building, seven days a week, the first years without a salary. And then an advisor applies a single calculation rule over it: "5x EBITDA, that is customary for this type of business." A single standard parameter, applied to a unique business, looking solely at the historical figures. A printing company, for example, is not considered a money-maker in this era of digitization. At the same time, there are specialized printing companies that earn an excellent living in their niche.
We previously wrote about Harari's book "Nexus" and the importance of storylines: we humans remember a story more easily than isolated facts, especially because a story establishes the connections between them. The same logic applies to business valuation, perhaps even more strongly.
The story behind the numbers
At its core, the value of a company is the sum of future cash flows, discounted back to today. It is therefore logical that the focus is primarily forward-looking. But looking ahead without knowledge of the history is difficult. That is why in most business valuations, past figures are also examined. However, there is no structured look from that financial history to the relevant facts behind the numbers. Digging deeper instead of just applying a single market parameter over it.
Facts, not assumptions
Within our ValueScript approach, we therefore work in three steps. First, we record what actually happened, and with each conclusion, we make an explicit distinction: is this evidence, with a source, or a plausible estimate? This transparency forces sharpness. After that, we clarify why something worked, or why it didn't. We contrast this with the industry average and, more specifically, the relevant competition. Crucial to this is the question: what does this mean for the value, now and in the future?
Why has that one customer remained loyal for fifteen years, even when a competitor offered a cheaper price? Why did the company manage to maintain a healthy margin while margins in the industry were under pressure? Those kinds of questions do not belong in a footnote, and certainly not in a rule of thumb. It is precisely the substantiation that makes a future projection credible, or not.
From loose facts to storyline
A buyer or investor pays for what is plausible. Figures that merely project a trend, or a multiple based on an industry average, are not convincing or may do the seller an injustice. A well-substantiated, structured analysis of the facts behind the numbers and their meaning for the future does.
A business valuation without that story is not a valuation. It is a calculation with a lot of assumptions that no one has tested.
Curious about what that story looks like for your business? We would be happy to have a conversation with you.
