What Is Your Business Worth?
If you are considering selling your business, you should be asking a different question – “What should my asking price be?” Determining an initial asking price is not an exact science. The asking price is simply a starting point but it has to be compelling enough to attract interest from potential buyers. At the end of the day, the terms of the deal are as important as the price.
If your business is generating more than a million dollars in annual revenues, consider having a formal valuation done by a certified valuation professional. It will help you determine an asking price and it will provide insight as to what is driving the value of your business. This information can help you to improve your business operations, financial results and enterprise value.
For many small businesses, a multiple of the Seller’s Discretionary Earnings (SDE) will generally provide sufficient insight to set an asking price. Determining SDE is an analytical exercise that starts with the P/(L) of a business and restates the income to reflect the true owner’s income/benefit from the business. The restatement involves adding back items like owner’s salary, other owner perks, non-cash expenses, non-recurring items as well as making market based adjustments for a variety of items. Applying a multiple is a bit of an art form. Insight into the sales of comparable businesses will provide a range of multiples – where your business falls in that range depends on its health and competitive position as well as the industry.
For businesses with little or no income/cash flow, a valuation will generally reflect the value of both the tangible and intangible assets.