Business valuation under the income approach can be done by capitalization (using multiples of SDE or Net Cash Flow) or discounting, using a stream of income.

Check out when these methods yield similar and different results at:

http://www.valuadder.com/valuationguide/business-valuation-capitalization-discounting.html

As an aside, most CPAs and bankers are not skilled in business appraisal. Business appraisal is a field of applied economics, not financial reporting or lending.

You do find EBITDA as a basis of business value estimation under the market approach, especially for publicly traded firms. As mentioned before, this is more reliable since these companies must comply with GAAP financial report guidelines, unlike closely held firms.

As a practical matter, most CPAs and bankers are not business appraisers. Many business appraisers are neither - rather financial analysts skilled in applied economics.

The Multiple of Discretionary Earnings method is one example. The method also allows you to account for a number of financial and operational strengths / weaknesses that business has.

Take a look at our implementation of this well-known business valuation method at:

http://www.valuadder.com/tour/multiple-of-discretionary-earnings.html

Please see this article on how capitalization and discounting valuation methods differ at:

http://www.valuadder.com/valuationguide/business-valuation-capitalization-discounting.html

A comment here:

EBITDA, EBIT, and Net Profit are familiar to accountants and bankers. They are sometimes used when establishing pricing multiples under the market approach to business valuation (i.e. comparable business sales).

For most closely held firms, the cash flow is the typical basis for determining the business value. The reason is that business value is an economic term, not an accounting one.

Experienced investors, such as venture capitalists, focus on the earnings-generating potential of a business enterprise. One of the key income-based methods used in appraising the value of a firm is Discounted Cash Flow.

I would suggest you review professional appraisal sources on the subject matter. A good reference is the text “Valuing Small Businesses and Professional Practices”, by Dr. Shannon Pratt et al, perhaps the most respected business appraiser in the US.

In other words, I don’t think I’ve encountered anyone in the “professional” accounting community who doesn’t look at EBIDTA (other then maybe Brad Sugars). Apparently I’m not hanging around the same people as you are. lol However I do agree with you that businesses should be valued based on cashflow.

In your experience, when using SDE or Net Cash Flow is that generally multiplied by some number based on the intangible “business strengths”? Or is it just taken as a single year of Net Cash Flow or SDE?

Small businesses and professional practices are generally valued based on some form of cash flow as the earnings basis.

The typical ones are: Seller’s Discretionary Earnings (SDE) and Net Cash Flow.