How Many Years of Results Should You Average When Evaluating a Business?

 I got a great question from Bob the other day about evaluating businesses. Specifically:

👉 “When looking at a business, how many years of results should I average together to figure out the right numbers—three, five, or more?”

The short answer: it depends. And here’s why. https://youtu.be/2To6nl7GIuw 

Why Simple Averages Don’t Work

Many buyers want to take three or five years of sales or profits, average them, and use that as the baseline for valuation.

The problem? A company three, four, or five years ago may be very different from the company today. Markets change, customer bases shift, management evolves, and growth (or decline) can dramatically alter performance.

That’s why I prefer weighted averages, with the most weight placed on the most recent year.

1. The Growing Company Example

Imagine a business that’s been consistently growing year after year.

In this case, the most recent year tells you the most about how the business is performing today. I’d weigh it heavily—say 50% on the latest year, maybe 20% on the prior year, and smaller percentages on the earlier years. If you have a reliable forecast and you’re already into that new year, you might even give it some weight too.

Key takeaway: A company with steady growth deserves more weight on the latest results.

2. The Declining Company Example

Now, flip the script: sales and profits have been dropping year after year.

If you’re the seller, you’ll want to argue for averaging several years to make things look stronger.
If you’re the buyer, you should weigh the most recent year much more heavily—maybe 85% current year, 15% forecast—because that declining trend is the reality.

And before you even crunch numbers, ask: Why are sales falling? Is it poor management you can fix, or is the industry itself in decline (think video rental stores after streaming)?

Key takeaway: Always pay for what the business is today, not what it was in the past.

3. The Uncertain Trend Example

Some businesses bounce up and down without a clear trajectory. Maybe it’s seasonal (like a ski resort tied to snowfall) or cyclical.

Here, I’d still weight the most recent year the most (say 60%), but sprinkle in more from prior years to account for variability.

Key takeaway: The latest year still matters most, but past fluctuations give context.

4. The Rapid Growth Example

Finally, what if the business is growing explosively—30%, 50%, even 100% year-over-year—thanks to unique products or intellectual property?

In this case, the company today looks nothing like the company even two years ago. I’ve worked on deals where we weighted 80% to the latest year and 20% to the forecast, with the understanding the valuation would need to be updated frequently as the business kept changing materially.

Key takeaway: Explosive growth businesses get valued mostly on the here-and-now, and they’ll often command a premium multiple.

So, what's the Rule of Thumb?

I never simply average three or five years. Instead, I:

• Weight the most recent year most heavily,
  
  

• Consider forecasts if reliable, and
  
  

• Reduce weight as you go back in time.
  
  

Because ultimately, what matters is:

• How the business operates today,
  
  

• What it’s likely to do in the near future, and
  
  

• Whether its trajectory is up, down, or uncertain.

Learn More

If you’re serious about buying or selling small businesses, check out: My Business Buyer Advantage course at BusinessBuyerAdvantage.com

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