While not universal, the most common practice is to take a target company’s EBITDA (which may be an adjusted number) or its EBITDA less CAPEX (in the case of businesses that require meaningful CAPEX each year) and multiply that number by some multiple. In the earliest days of private equity investing, multiples were often in the mid-single digits, but as more capital has become available to private equity (thereby creating competition), companies in attractive industries, higher growth rates, higher profit margins, and/or better equipment and facilities, and companies of size are often able to command significantly higher multiples.
Strategic acquirors – large industrial companies looking to add scale, locations, technology or some other capability of strategic benefit – often pay more than do private equity investors due to the perceived greater value of the target company to the strategic acquiror’s growth strategy, but the same approach – EBITDA (or cash flow) times a multiple – is always the baseline of any proposal.
Usually, the purchase price is on a “net debt free/cash free basis”. This means that the acquiror will pay off your company’s debt at closing (it’s bank debt, equipment finance, etc.) out of the purchase price and any cash in the business will be paid to you. The purchase price will be subject to further adjustment (up or down) depending on how much net working capital (saleable inventory and receivables less payables) is with the business at the time of sale.