The diagram below illustrates how our process would work with a typical company doing $2 million in sales and earning an after tax 15% profit margin, for $300,000 in net income. Based on the gross sales, the company only justifies a 3X earnings multiple, so the initial valuation is $900,000.
Over a period of 18 – 24 months, we inject massive amounts of marketing while streamlining operations and cutting costs. At the end of this period, we’ve increased sales to $10 million, while increasing the after-tax profit margin to 30%. At first glance, you might think the company would be worth ten times as much. However, because the gross sales are now $10 million, the company now qualifies for a much higher 8X earnings multiple. Therefore, in this hypothetical example, the company has increased in value by more than 24 times, for a final valuation of $24,000,000.
