A £3.5m valuation from two years of earnings

The illustration

The source proposes looking at two years of pretax earnings for a smaller industrial or business-service acquisition. Its example uses £750k in one year and £1.25m in the next, then applies a multiple to their average. This is a hypothetical valuation framework reflecting the speaker’s acquisition preferences, not a market quotation or a completed offer. Watch source

Reproduce the arithmetic

1. Add the two annual figures: £750,000 + £1,250,000 = £2,000,000.
2. Divide by two years: £2,000,000 ÷ 2 = £1,000,000 average annual pretax profit.
3. Apply an illustrative 3.5-times multiple: £1,000,000 × 3.5 = £3,500,000 enterprise value.

For comparison, the same £3.5m price divided by only the stronger year’s £1.25m is 2.8 times; divided by the weaker year’s £750k it is about 4.67 times. Those comparisons are editorial calculations. They show why a multiple without its earnings period can mislead. A low-looking ratio may come from choosing an unusually strong denominator rather than negotiating a lower price.

What remains to investigate

A two-year average smooths the figures but does not prove sustainable earnings. Investigate why profit changed: customer demand, prices, owner compensation, unusual costs or incomplete reporting may matter. The source metric is pretax profit, so do not relabel the £1m average EBITDA without a reconciliation.

Enterprise value also does not establish the seller’s completion payment. Cash, debt, working-capital adjustments, payment timing and fees still need treatment. Nor does the £3.5m figure prove that lenders and equity investors will fund the purchase. The mechanism is a disciplined way to state an offer’s starting assumptions, with diligence deciding whether those assumptions hold. Continue with valuation multiples and enterprise value.