Valuing companies may be more of an art than a science, but there are three basic factors that acquirers look for when attempting to establish a price for a target company.

1. Quality of earnings - There should not be a long list of add-backs or one-time events, such as the sale of real estate, that do not reflect the true earning power of the company's operations. It is not unusual for companies to have some non-recurring expenses every year, whether a new roof on the plant, a hefty lawsuit, or a write-down of inventory. It is unrealistic to restructure a seller's earnings to include all of the add-backs during any given year as every business has some extraordinary expenses every year.

2. Sustainability of earnings after the acquisition - Two key questions acquirers often ask themselves: Is the company at the apex of its business cycle? And, will earnings continue to grow at the previous rate?

3. Verification of information - A major concern of an acquirer is whether the information provided is accurate, timely and relatively unbiased. Has the target company allowed for possible product returns or for uncollectable receivables? Is the seller above-board or are there some skeletons in the closet?

The multiple of corporate earnings can vary with certain aspects of the business, including company history, the industry, market, management, the company's potential, proprietary products, niche, growth rate and size.

The multiple of earnings also depends on the acquirer's desired rate of return. For example, a five multiple represents a 20 percent return on investment, while a four multiple represents a 25 percent return on investment; the higher the perceived risk, the higher the desired return on investment.

Surveys have indicated that the larger the company, the larger the multiple of EBIT (Earnings Before Interest and Taxes).