Business Value Acceleration
Business Valuation Isn’t About Multiples – It’s About Methodology
Valuing a business is far more than applying simple earnings multiple. It’s a nuanced process that reflects not just financial performance, but also operational resilience, strategic readiness, and risk exposure. In our work with founders, advisors, and succession planners, we’ve seen firsthand how the choice of valuation method can dramatically influence outcomes – whether you’re preparing for an exit, structuring an ESOP, or simply benchmarking progress.
This blog explores commonly used valuation methods – and why we advocate for a more comprehensive approach: the Weighted Average Maintainable Earnings (WAME). Unlike traditional models that rely heavily on EBITDA multiples, WAME integrates financial, benchmarking, economic and non-financial data, adjusts for risk factors, and aligns valuation with strategic goals.
Weighted Average Maintainable Earnings (WAME) Valuation Approach
Overview
The WAME method is a structured approach to valuing a business based on its ability to generate sustainable profits over time. It calculates a weighted average of historical earnings, typically over the past 3–5 years, adjusted for anomalies and applies a capitalisation multiple to derive an enterprise value.
Key Steps in the WAME Methodology
1. Select the Earnings Metric. Commonly used metrics include:
- EBIT (Earnings Before Interest and Tax)
- EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation)
- NPBT (Net Profit before Tax)
- NOPAT (Net Profit after Tax) – we use this metric, and it includes everything – Warren Buffett and Charlie Munger both advocate this metric.
2. Normalise Earnings. Adjust for:
- One-off revenues or expenses
- Owner’s remuneration above/below market
- Non-operating income or costs
- Accounting policy changes
3. Apply Weightings. Assign higher weights to more recent years to reflect current performance trends. For example:
- Year 1 (most recent): 50%
- Year 2: 30%
- Year 3: 20%
4. Calculate Weighted Average. Multiply each year’s normalised earnings by its weight and sum the results.
5. Apply a Capitalisation Multiple. The multiple reflects the risk and growth profile of the business and is typically derived from:
- Industry benchmarks
- Detailed non-financial analysis (our software for example uses over 150 data points)
- Analysis of economic, industry and company specific risk
6. Adjust for Surplus Assets or Liabilities. Add or subtract non-operating assets or liabilities to arrive at the final equity valuation.
Why We Use WAME with All Clients
- Stability and Predictability. It smooths out volatility and avoids over-reliance on a single year’s performance.
- Customisable and Transparent. Clients can see how each year contributes to the valuation, and adjustments are clearly documented.
- Fair Reflection of Business Trajectory. Weightings allow us to emphasise recent improvements or declines in performance.
- Universally Applicable. Suitable for businesses of all sizes and industries, especially SMEs where market comparables may be limited.
- Supports Succession and Exit Planning. Provides a defensible, repeatable valuation framework that aligns with long-term strategic planning.
Cost of Equity in Context
The cost of equity represents the return required by investors to compensate for the risk of owning the business. It is a key input in determining the capitalisation multiple.
How It’s Calculated
We typically use the CAPM (Capital Asset Pricing Model):
Cost of Equity=Risk-Free Rate+β× (Market Return−Risk-Free Rate) +Size Premium+Company-Specific Risk Premium
- Risk-Free Rate: Based on long-term government bonds (10-year AU government bonds)
- Beta: Adjusted for private company risk, based on the non-financial analysis and industry factors like competition and barrier to entry.
- Size Premium: Reflects higher risk in smaller businesses
- Company-Specific Risk: Based on qualitative factors (e.g., customer concentration, management depth)
This cost of equity is then used to derive the capitalisation rate (inverse of the multiple).This is used as a proxy for the return expected by equity holders, given the risk within the business/investment.
We use this methodology with all clients, and our software has been written to match this approach (we have completed over 1,000 valuations using this approach).
In terms of typical results:
For small, privately held businesses, WACC tends to be higher than for large public companies due to:
- Higher perceived risk
- Limited access to low-cost capital
- Illiquidity and lack of marketability
Typical ranges:
| Business Type | Typical WACC Range |
| Stable, low-risk, larger businesses | 12% – 18% |
| Moderate-risk, medium businesses | 18% – 25% |
| High-risk or early-stage, small businesses | 25% – 35%+ |
Market Comparisons
Market comparisons are often used as a shortcut for valuation, but they can be misleading when deal terms vary significantly and are not fully disclosed. Each transaction may include unique conditions such as earn-outs, contingent payments, bundled services, or strategic partnerships that materially affect the price but are not visible in public summaries. Without access to the full structure of a deal, comparing headline figures can distort the true value being exchanged and lead to flawed conclusions.
Moreover, the lack of transparency in deal terms means that market comparables rarely reflect the nuances of timing, risk allocation, or performance incentives embedded in the agreements. For example, a deal with a high valuation might include aggressive growth targets or deferred payments that reduce its actual present value. When these details are hidden or unevenly reported, relying on comparable can create a false sense of precision and overlook the bespoke nature of each transaction.
The value of a deal can vary significantly depending on its structure. For instance, there’s a substantial difference between a transaction where I purchase your business today for $5 million in a single upfront payment allowing you to retire immediately versus a deal where I agree to pay $5 million, but with $3 million paid today, $1 million in 12 months, and the final $1 million in 24 months, both of which are contingent upon your continued involvement in the business and achieving specific performance targets (e.g., revenue, profit, or other milestones).
