Fair Market Value (FMV) Valuation

Formula

Valuation = Metric × Multiple\nAvg Value = (Val_Rev + Val_EBITDA + Val_PE) / 3

Relative valuation relies on comparing your metrics to similar companies. EBITDA is the most common metric for profitable mature businesses, while Revenue is used for high-growth startups.

Worked Examples

Example 1: Pre-Profit SaaS Startup - Revenue Multiple Only

Problem:A B2B SaaS company has $1M ARR and breaks even at $0 EBITDA. Comparable transactions in its niche clear at 6x revenue. What is it worth, and why is EBITDA useless here?

Solution:Valuation = Metric x Multiple = $1,000,000 x 6.0 = $6,000,000 Why revenue and not earnings: at $0 EBITDA, an earnings multiple returns $0 regardless of the multiple applied, and a P/E ratio is undefined. Any company deliberately reinvesting gross profit into growth has to be valued on the top line. What sets the multiple: the Rule of 40 - growth rate plus profit margin. This company at 40% growth and a 0% margin scores 40 and earns a market multiple. The same $1M ARR growing 15% at a -20% margin scores -5 and would trade at a steep discount, perhaps 2-3x, cutting the valuation to $2-3M on identical revenue.

Result:$6,000,000 enterprise value. The multiple, not the revenue, is what the negotiation is actually about.

Example 2: Profitable Services Business - Triangulating Three Multiples

Problem:An established agency reports $8M revenue, $1.2M EBITDA (a 15% margin) and $780K net income. Comparables trade at 0.9x revenue, 5.5x EBITDA and 12x earnings. What is the defensible range?

Solution:Run all three methods: Revenue basis: $8,000,000 x 0.9 = $7,200,000 EBITDA basis: $1,200,000 x 5.5 = $6,600,000 Earnings basis: $780,000 x 12 = $9,360,000 Blended average: ($7,200,000 + $6,600,000 + $9,360,000) / 3 = $23,160,000 / 3 = $7,720,000 Reading the spread: the three answers span $6.6M to $9.36M, a 42% gap between low and high. That spread is the real output. For a mature, profitable business the EBITDA figure carries the most weight because it is the metric an acquirer will actually finance against; the earnings multiple sits highest here only because net income is flattered by low interest expense.

Result:Blended $7.72M, with a defensible range of $6.6M-$9.4M. Anchor negotiations on the $6.6M EBITDA figure.

Example 3: Multiple Sensitivity and the Net Debt Bridge

Problem:A manufacturer earns $2.5M EBITDA. The buyer opens at 6x, the seller wants 7x. The business also carries $3.5M of debt and $500K of cash. How much is one turn worth, and what does the seller actually receive?

Solution:One turn of EBITDA: At 6.0x: $2,500,000 x 6.0 = $15,000,000 At 7.0x: $2,500,000 x 7.0 = $17,500,000 Difference = $2,500,000, a 16.7% swing in enterprise value from a single turn. Enterprise value is not the cheque: Net debt = $3,500,000 debt - $500,000 cash = $3,000,000 Equity value at 6.0x = $15,000,000 - $3,000,000 = $12,000,000 Equity value at 7.0x = $17,500,000 - $3,000,000 = $14,500,000 The leverage effect: that same $2.5M turn is 16.7% of enterprise value but 20.8% of the seller's equity proceeds ($2.5M / $12M). Debt magnifies the impact of the multiple on what the owner banks, which is why highly leveraged sellers fight hardest over the last half-turn.

Result:One turn = $2.5M of enterprise value but 20.8% of the seller's equity. Always convert enterprise value to equity value before negotiating.

Frequently Asked Questions

What is EBITDA?

Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures operational profitability.

Why are SaaS multiples so high?

Recurring revenue (ARR) is highly valued because it is predictable and high-margin.

What is a 'Multiple'?

A ratio used to estimate value. If comparable companies sell for 10x EBITDA, you assume your company is also worth 10x EBITDA.

How accurate is this?

It is a ballpark estimate. A real valuation requires a professional appraisal (409A or CIM).

Does growth rate matter?

Yes! A company growing 100% YoY will get a much higher multiple than one growing 5%.

Is this FMV?

Fair Market Value is the price a willing buyer and seller agree upon. Fair Market Value (FMV) Valuation estimates that price based on market norms.

What is SDE?

Seller Discretionary Earnings. Used for 'Main Street' businesses. It's basically EBITDA + Owner Comp.

Background & Theory

Which Multiple to Use?

EV/Revenue: Best for high-growth startups or loss-making companies.
EV/EBITDA: Best for mature, capital-intensive, or profitable businesses. Proxy for operating cash flow.
P/E (Price to Earnings): Best for stable, low-growth companies and public stocks.

SDE vs EBITDA

For small businesses (<$5M Revenue), buyers often use SDE (Seller Discretionary Earnings) instead of EBITDA. SDE adds back owner salary and perks. This calculator's "EBITDA" field can be treated as SDE for small biz.

Liquidity Discount

Private companies usually sell at a 20-30% discount to public peers because you can't instantly sell the stock (Illiquidity Discount).

History

The Art of Valuation

Valuation is "Art and Science". Historically, Discounted Cash Flow (DCF) was the gold standard. However, DCF relies heavily on predicting the future. In the 1980s, private equity popularized "Relative Valuation" (Multiples) as a faster, market-based reality check.

The Rule of 40

In modern SaaS valuation, the "Rule of 40" (Growth Rate + Profit Margin) heavily influences the multiple. High growth companies command massive revenue multiples even if unprofitable.