One extremely crude but sometimes useful rule of thumb is that a business is worth about 10 times as much as it made this year. If you have a hardware store or a dental practice or a newsletter and it made $1 million this year, and you want to sell it to someone else, they should pay you about $10 million for it.

Oh, I’m kidding! Not literally 10!1 There are tons of variables that go into any valuation, and I am ignoring all of them. How fast is the business growing? What do its long-term prospects look like? What do I even mean by “made $1 million”: Is that net income, or revenue, or Ebitda (earnings before interest, taxes, depreciation and amortization), or some other measure of earnings? A business is worth the value of all of its expected future cash flows, discounted back to present value at some appropriate cost of capital. Sometimes, the growth rate and discount rate will work out such that that number will turn out to be roughly 10 times this year’s earnings, but of course it could be much more or much less. Still, I mean, gun to my head, 10.2

QOSHE - How Much Do Buffett's Truck Stops Make? - Matt Levine
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How Much Do Buffett's Truck Stops Make?

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12.12.2023

One extremely crude but sometimes useful rule of thumb is that a business is worth about 10 times as much as it made this year. If you have a hardware store or a dental practice or a newsletter and it made $1 million this year, and you want to sell it to someone else, they........

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