I agree billings are wrong. I've also never seen an accountant's valuation of a business that I thought was truly close to market price (no disrespect intended, Bigfin).
I would think that 2 to 3 times EBITDA would be correct (Earnings before Interest, Taxes, Deperciation and Amortization). Essentially, what Moosie said earlier without spelling errors.
No offense taken Brymore.
2 to 3 times EBITDA will essentially be a 33% to 50% capitalization rate of current cash flows. In pass through entity, which any of my professional service clients operate as, there is no tax at the entity level, so we are talking EBIDA. If the purchaser is making a cash purchase and eliminating all debt and therefore interest expense, which is not the case here, we would eliminate the "I" and look at EBDA, which is "operating cash flow," one of the valuation methods we normally see for personal service businesses.
Knowing the normal margins under which civil and other engineering firms operate, a "billings" valuation as Curly explained above would msot likely result in a much lower ending value than any of the other methods, helping Curly's cause.
If billings are inflated for billed costs, or this firm has a very low profit margin as a percent of gross billings (compared to other firms) then Curly might not get a good deal, thus my disclaimer above. As IDHunter noted in his example above, a very low margin can exist, but that is very seldom the case in engineering firms. If his example he listed was happening at an engineering firm, they had better find a new line of work.
The reality of this, and all small business sales, is that the "selling price" (not necessarily the valuation) ends up being somewhere between what the buyer will pay and the seller will accept. Sounds overly simplistic, but having helped hundreds of businesses be bought and sold, it quickly becomes obvious that "valuations" are irrelevant if they come in higher than a buyer will/can pay and lower than a seller will/can accept. Thus the reason buy/sell agreements with formulas and methodologies are so helpful. If you like the price determined under the formula, you go forward. If not, I guess you shouldn't have signed the agreement.
Curly asked how to "value a company." To value it is one thing. Whether or not the value will be acceptable to buyer or seller is completely different.
