The first question business owners ask their business broker Tecate is what is my business worth? This is a very important question to ask in order to have a rough idea on how much you will get after selling. At times, the question is asked out of curiosity. Some business owners just want to know if their business has increased in value. The first point you should understand is there is no simple answer to the question on how much your business is worth.
Different Valuation Methods
There are several business valuation methods used. The method your business broker Tecate will choose will depend on your reason for requesting a business valuation. In this post, our focus will be on how a business is valued for the purposes of selling it to a third party.
An important point to remember is that what your business is worth is what a buyer is willing to pay for it. The market your business as well as the current economic climate will also affect the value of your business. When there is a high demand for the items your business sells, demand for businesses like yours will be high. As a result, the value of your business will be higher. Your business broker will be happy to discuss all the factors that affect the value of your business.
Multiple of EBITDA
A business is value as a multiple of Earnings Before Interest Taxes Depreciation and Amortization (EBITDA) or the Seller’s Discretionary Earnings (SDE). The key difference between EBITDA and SDE is that with SDE the seller will add back salary and benefits on top of the EBITDA number. To determine the value of your business, you calculate the SDE for the last 3 to 5 years then complete a weighted average. Your business broker in San Diego will tell you that this calculation is more of an art than a science.
Determining the Multiple
The majority of businesses sell for 2 to 5 times SDE. Most businesses with an SDE of less than 1 million sell for an average of 2 times. As a result of this, most business owners choose not to sell if the multiple is just 2 times. Selling for other reasons may, however, force you to sell.
The other common methods of calculating the value of a business include the asset method and the discounted cash flow. When selling a small business, these additional two methods are usually overstated or understated.
The information we discussed in this post is not everything you should know about business valuation. To find out more, you have to speak with an experienced business broker Tecate. The broker will determine the most ideal valuation method based on the reason for selling.