Transworld business brokers have the opportunity to talk with many types of business owners, large and small, across all types of industry. Two questions that almost all business owners have for us are:
Do I have a business I can sell?
and,
How much is my business worth?
Let’s talk about that 2nd question. Just how are small businesses valued?
There are many methods of valuing businesses that technically all have merit and could potentially lead to a valuation that might make some sense. If you took a course on business valuation you might learn about Asset Based Valuation, or Market Based or Book Value Valuation. But the reality is that for almost all small businesses, the only method that really matters is a Multiple of Earnings. Simply put, that means a buyer and the buyer’s bank, if they have one, want to buy a business based on the concept of understanding how long it will take for them to make their money back. That multiple might change between industries and depending on the business size (and that is where Transworld’s expertise can really help you), but the same method holds true for almost all small businesses. It’s a multiple of the amount of money a business makes historically with a bias toward the most recent year or perhaps most recent few years.
Typically, larger businesses use the concept of EBITDA and apply a multiple to that. Smaller businesses, often those operated by the owner and say under $1 million in sale price (though that is not always the case), use the concept of Sellers Discretionary Earnings (“SDE”). SDE can most easily be defined as EBITDA plus owners compensation and any other reasonable expenses that can be “added back”. Another way to define it is a cash-flow based measure of business earnings in an owner-operated business. It comprises the profit before tax and interest of a business and before the owner's benefits, non-cash expenses, extraordinary one-time investments, and other non-related business incomes and expenses.
But what does that mean in plain language? Think of it this way: If I am going to buy your business from you, and I am going to run it the way you do, and hopefully as well as you do, how much money am I going to make? Transworld brokers will sit with a business owner, look at financials and identify the SDE of a business. Most importantly we will look at it from the lens of a buyer and a buyer’s bank. Then we will talk about a multiple of that SDE to come up with a good sale price.
With some exceptions for things like saleable inventory, for the most part, a business is sold in one package that includes all the assets of the business tangible and intangible. As a buyer, I want to buy everything I need from you to continue to run your business smoothly and seamlessly. That will include the support and training needed to get up to speed and learn the business from you and your staff as well. It’s a common misconception that you sell the business and then the assets (think trucks, forklifts, fixtures, etc.) separately. All those assets are needed to make the money you make. Or put another way, you can’t make the money you make without all of those assets whether they be tangible or not. So generally, all the assets, knowledge, reputation, reviews, customer base and the seller’s training and transition is included in one sale price.
In the end a business is not worth what a broker or an owner say it is…it is worth what someone will pay for it right? Buyers and buyer’s banks generally use a multiple of SDE for smaller businesses and Transworld will help you understand that valuation.
The first step in deciding if you want to sell your business is understanding if you have a business someone would buy, and then, how much is it worth. Reach out to us to learn more about how we can assist you in understanding your business’ valuation.