By Jean Murray
Multiples of Earnings
The earnings (income) of a business are used to value a business. In most cases, EBIT (earnings before interest and taxes) is the measure used. Buyers use rules of thumb to value businesses based on multiples of business earnings. For example, a buyer might pay 3 or 4 times earnings if a business has market leadership and a strong management.
In many cases, earnings are normalized or adjusted to take out income taxes, non-recurring income and expenses, non-operating income and expenses, depreciation and amortization, interest expense or interest income, owner compensation.