One of the first questions every business owner asks when considering a sale is, “What is my business worth?”
It’s a fair question, but often not the easiest one to answer. More importantly, it’s important to understand that what you want for your business and what the market is willing to pay are often two very different numbers.
Just as with residential real estate, you can list your home for any price you choose. But your home will ultimately sell for what informed buyers, and their lenders, agree it’s worth. Businesses are no different.
Most Small Businesses Sell Based on Seller’s Discretionary Earnings (SDE)
For most owner-operated businesses, value is determined primarily by a multiple of Seller’s Discretionary Earnings (SDE). SDE represents the total financial benefit available to a working owner and includes the business’s net profit plus the owner’s compensation and certain discretionary expenses.
The multiple applied to those earnings depends on the quality, stability, and risk of the business.
Businesses Selling for 1.5x to 2x SDE
Companies at the lower end of the valuation range often have one or more of these characteristics:
- The business is struggling or experiencing declining sales.
- Nearly all of the value depends on the current owner.
- The owner and perhaps a spouse are the only people operating the business.
- A buyer will need to step in and work in the business every day to replace the owner.
These businesses can certainly sell, but buyers recognize they are purchasing a job along with the business, and they expect to be compensated for that risk through a lower purchase price.
Businesses Selling Around 3x SDE
A healthy, well-run business with consistent earnings often commands a multiple around 3x SDE.
These businesses typically have:
- Stable and repeatable revenue.
- Several employees handling day-to-day operations.
- An assistant manager, lead employee, or trusted right-hand person.
- Systems and processes that allow the business to continue operating without constant owner involvement.
This is the range where many successful small businesses are bought and sold.
Businesses Worth 3.25x to 3.5x SDE
Higher multiples are earned, not assumed.
Businesses that receive these valuations generally demonstrate:
- Strong and consistent profitability.
- A clear upward trend in revenue and earnings.
- Financial records that are clean and well documented, so important!
- A business that continues to improve year after year.
Buyers pay premium prices when they see momentum, predictability, and reduced risk.
Businesses Selling at 4x SDE or More
Four-times multiples are relatively uncommon in the small business market, but they certainly do occur.
Generally, businesses reaching this level are producing over $1 million in Seller’s Discretionary Earnings, have experienced management teams, diversified customer bases, and systems that allow the company to operate with limited owner involvement.
These businesses begin attracting larger pools of buyers, including private equity groups and strategic acquirers, which can drive valuations higher.
Why Overpricing Is One of the Biggest Mistakes Sellers Make
It’s understandable that owners believe their business is worth more than the market indicates. After all, they’ve invested years, sometimes decades, building it.
Unfortunately, buyers don’t pay for effort, sacrifice, or sentimental value. They pay for future earnings and the level of risk involved in generating those earnings.
An overpriced business often experiences several predictable outcomes:
- Serious buyers never inquire because the price falls outside accepted valuation ranges.
- Qualified buyers cannot obtain financing because lenders won’t support an inflated purchase price.
- The listing sits on the market while newer, properly priced opportunities receive attention.
- Eventually, the business becomes “stale,” leading buyers to wonder what’s wrong with it.
Ironically, businesses that start overpriced often end up selling for less than they would have if they had been priced correctly from the beginning.
The Goal Isn’t to List, It’s to Sell
If your objective is simply to put your business on the market, you can choose any asking price you’d like.
If your objective is to actually sell your business, pricing must reflect market reality.
The market, not the seller, not the broker, and not the buyer, ultimately determines value. Buyers, lenders, accountants, and appraisers all tend to rely on similar valuation methods, which creates a relatively narrow range of reasonable selling prices.
Pricing within that range attracts qualified buyers, creates competition, shortens the time on the market, and often results in a stronger negotiating position.
Final Thoughts
Selling a business is one of the most significant financial events in an owner’s life. Starting with a realistic valuation is one of the best decisions you can make.
A properly priced business attracts attention, builds buyer confidence, and gives you the best opportunity to achieve a successful sale.
If you’re considering selling your business, begin with an objective valuation based on current market conditions, not emotion. Knowing what your business is truly worth is the first step toward achieving the outcome you’re looking for.
Patrick Bombardiere of Transworld Business Advisors can help you determine what your business is worth today and provide guidance on how to grow the business and improve its profitability to increase your ultimate sale price.
Contact Patrick:
patrick@tworld.com
303-929-9219