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I'm in a position to buy into a local, private engineering firm. But I'm curious what the best way to find the valuation.

Is it strictly sales? If the company had x in total sales it's worth x?

Or is it some ratio of that? Total sales times 0.75? or 1.25?

Just curious on your thoughts.

Mike
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Just curious on your thoughts.

I'd value off of net profit. Then, value it based on the internal rate of return you want for that investment. Stocks are on the order of ~10% IRR. Rental real estate is ~20% IRR. I would think an engineering company is more risky than that, so you're in the range of 22-28% IRR.
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You need to look at net profit. Many folks use EBITDA. But on top of that you'll have to look at their backlog (ongoing jobs) to try to get to an estimate of value since the smaller the firms, the more that a particularly large project will "spike" the data.
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I would think you would want to give careful consideration to what it would cost to create an equivalent firm on your own.

Most engineering companies probably have few assets other than staff, and their reputation and relationships that allows them to bid on and get new contracts.

Hence, you are acquiring mostly reputation and staff. Finding the value of the hard assets is the easy part. But you would think the value is strongly tied to future sales and a sales agreement that reflected that would be most desirable.
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Hence, you are acquiring mostly reputation and staff. Finding the value of the hard assets is the easy part. But you would think the value is strongly tied to future sales and a sales agreement that reflected that would be most desirable.

Yeah, I think a lot of firms actually have one guy who brings in most of the business through his contacts, you want to make sure you're not losing that guy if you buy the company.
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"Just curious on your thoughts.

Mike "

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Run.

Howie52
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>I'm in a position to buy into a local, private engineering firm. But >I'm curious what the best way to find the valuation.
>
>Is it strictly sales? If the company had x in total sales it's worth x?
>
>...Just curious on your thoughts.


I know I'm coming to this thread pretty late, but here's *my* thought:
If you don't know the answer to your own question, don't buy. A good candidate to buy the company would be somebody who knew the value of such firms and had some idea how to run it...someone who had maybe worked there or an equivalent place, had thoughts about the good things and not-so-good that management did, and had an understanding of the money in / money out aspects of this kind of business.
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