What's your Business Really Worth?

If you're a business owner with aspirations of selling your business, then it's important to understand what your business is worth in the current marketplace. The value of your business will largely be determined by the multiple of your earnings. So, for small businesses with EBITDA of less than $1 million, the focus is on seller's discretionary earnings (SDE). This is the EBITDA plus one owner's compensation and benefits.

The calculation of SDE is subjective and best handled by an experienced business broker/intermediary. Once SDE is properly calculated, the most probable market value range can be determined for the business. This is often based on comparable sales in your industry.

Now, when it comes to what multiple of SDE your business will sell for, the answer is two times, maybe three or four, but also possibly as low as one. This is largely driven by the quantity and quality of your earnings. Businesses with minimal SDE may only sell for one-time SDE, while small businesses with SDE of $750,000 may see a multiple range of one to four.

Quality of earnings will also play a role in the multiple. This will be determined by the buyer's belief that the profit was not a fluke and will continue to grow into the future with a new owner at the helm. Factors that can contribute to quality of earnings include past years earning trends, quality of books and records, customer base diversification or concentration, industry trends, location, employee skill and longevity, brand and other intellectual property, goodwill, asset value, ease of transfer, competition levels, ability to finance the transaction, and potential.

At Transworld Business Advisors of Atlanta, ultimately, we know that business valuation is an art, not a science, and it's rare that two valuation experts will agree when presenting formal reports. So, it's important to understand the formulas and the market trends, but also stay committed to your reason for selling. If you can wait and make the money you would earn in the sale, then do so. But if you need to sell, then accept your valuation and start the process.