With all due respect to those who sell software and tools to do business valuations, it is all rubbish.
Small business valuations should be simple and should rely only on a few selected metrics.
I am astonished at how sophisticated valuation techniques can be and still miss the boat.
In fact I used to subscribe to many of the techniques, the DCF method, IRS method, the Capex method the Book Value method, the revenue method.
I used to run several types of valuations for each deal.
I used to create printed valuation books to present to our target companies.
It was highly impressive but useless.
The valuations were always tossed out early in the process.
For one thing they overcomplicated everything.
Sellers do not really want to have to understand overcomplicated valuations, anything that adds to the complexity just hurts your chances of getting to a deal.
I gave up valuing companies using sophisticated techniques in favor of a simple multiple of earnings before taxes, interest and depreciation (EBITDA).
I will often use the same multiple of earnings approach for every business and arrive at an accurate valuation in 1 minute or less.
Three to Five times EBITDA.
The valuation often needs to be adjusted for a number of key factors but as a business buyer you can safely make an offer within or even outside this range of values.
Now here's the interesting part.
If I have valued the company at 3 times EBITDA I may just offer the seller 2 times EBITDA.
There is no law that says you have to offer what the company is worth.
It follows that the valuation may bear only a passing resemblance to the ultimate transaction price as well.
So do not place too much stock in valuations when buying a business.
Do the multiple method for a good minute and continue to refine the price along the way according to the facts that arise during the deal process.