How Do I Value a Business
Are you asking “How Do I Value My Business?” because you are considering selling your company within the next five years? This website provides numerous articles to enable you to learn how to value your business using multiples of earnings. While it is important to understand how small businesses are valued, we’d like to offer another suggestion.
To develop longer-term relationships with prospective sellers, many business brokers offer no charge, no obligation evaluations of businesses. If you are considering a business sale within the next five years, it’s best to turn to a professional so you can get a truthful reading of where your business valuation currently stands. You need to know the value of your business to make an intelligent decision regarding your future. Just as in planning a road trip, when planning your exit strategy, to get to where you hope to be, you need to know where you are at right now. It’s best if you have an accurate feel for the value of your business, and a qualified business broker can provide that.
for a more a complete understanding of how to value a business check out this article: how to value a small business for sale
How a Business Broker Values a Business
When a business broker values a business, they use a method referred to as multiples of earnings. To complete an evaluation they will require 3 - 5 years of your tax returns and/or financial statements. The net income shown on the financial information will be “recast” or “normalized” to develop the “true” owner benefits the business provides. First they will compute EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). To EBITDA they will make additional adjustments to add back all owner compensation and owner perks to arrive at seller’s discretionary earnings (SDE). There may be other adjustments that are required as well. For profitable small businesses, the valuation of the business will be determined by applying a multiple to the SDE. For example, if your SDE is determined to be $200,000, the appropriate multiple is about 3.0x and the business value is about $600,000 (3.0 x $200,000). To view a chart for SDE multiples by business size, read Newsletter Issue #6 - How Small Businesses Are Valued Based on Seller's Discretionary Earnings (SDE).
Again, many business brokers will provide an assessment of your business at no charge with no obligation. Allowing them to do so does not mean you need to sell the business in the short term. Qualified business brokers can not only provide a broker’s opinion of value, they can also help identify obstacles to a successful sale and identify opportunities to increase the value of the business. However, to be sure you are interacting with a qualified business broker, be sure to read Newsletter Issue #13 - Choosing a Business Broker/Intermediary.
ATTENTION: Business Owners & Prospective Sellers!
For a more in-depth explanation of how to value a business, check out these 6 articles featured in the How to Sell a Business Newsletter Series. There may be nothing more important to a successful sale than your full comprehension as to what your business is worth and how your company value will be determined. Following is a brief description of the 6 articles:
Newsletter Issue #6 - How Small Businesses Are Valued Based on Seller's Discretionary Earnings - Explains SDE and contains a chart of SDE multiples by business size.
Newsletter Issue #7 - SDE vs. EBITDA vs. Adjusted EBITDA Leads to Multiples Confusion - Explains the importance of specificity in describing “earnings” to avoid confusion when choosing a valuation multiple.
Newsletter Issue #8 - An Example of SDE vs. EBITDA vs. Adjusted EBITDA - Explains by example how one company with the same valuation has 3 different multiples. Hint: the multiple depends on the measure of earnings.
Newsletter Issue #9 - A Seller's Discretionary Earnings (SDE) Worksheet - Contains an example of an SDE worksheet with 29 add backs.
Newsletter Issue #10 - SDE and Business Valuation Variations amongst Sellers, Buyers and Lenders - Explains how a seller, a buyer and a lender arrive at different business valuation conclusions based on their acceptance or rejection of the 29 add backs in Newsletter Issue #9.
Newsletter Issue #11 - The Importance of Setting a Realistic Offering Price - Explains why it is counter-productive to overprice a business for sale.