One of the first questions nearly every business owner asks before selling is:
“How much is my business worth?”
There is no single formula that works for every company.
Two businesses generating exactly the same revenue can have dramatically different values because buyers generally purchase future economic benefits rather than revenue alone.
Revenue Is Not the Same as Value
A company producing $3 million in annual revenue but very little profit may be worth less than a $1.5 million company producing strong, consistent cash flow.
For many privately held businesses, buyers focus heavily on either Seller’s Discretionary Earnings (SDE) or EBITDA, depending on the size and nature of the company.
What Is SDE?
Seller’s Discretionary Earnings attempts to estimate the economic benefit available to one owner-operator.
Depending on the circumstances, adjustments may be made to reported earnings for certain owner compensation, discretionary expenses and qualifying non-recurring expenses.
What Is EBITDA?
EBITDA means earnings before interest, taxes, depreciation and amortization.
It is commonly used when evaluating larger operating companies and allows buyers to compare operating performance across businesses with different capital structures.
What Determines the Multiple?
The earnings figure is only half of the valuation equation.
Buyers also consider the quality and risk of those earnings.
Factors that can influence valuation include:
Recurring revenue, consistent growth, management depth, low owner dependence, customer diversification, competitive advantages, clean financial records, favorable leases, transferable contracts, industry outlook and barriers to entry.
Owner Dependency Can Reduce Value
Consider two similar companies.
Business A requires the owner to work 60 hours every week and personally manages every important customer relationship.
Business B has management, systems and employees capable of operating the company without daily owner involvement.
Even with similar financial results, Business B may be considerably more attractive to prospective buyers.
What Can Reduce the Value of a Business?
Potential concerns include declining sales, inconsistent financial records, heavy customer concentration, unresolved legal issues, short leases, excessive dependence on the owner, outdated equipment and significant unreported cash transactions that cannot be independently verified.
Don’t Choose an Asking Price Based on Emotion
Owners naturally remember the years of work, risk and sacrifice invested in their companies.
Buyers, however, evaluate the expected future economics and risks of the acquisition.
An unrealistic asking price can discourage qualified buyers and leave a business sitting on the market.
Find Out What Your Business May Be Worth
If you’re considering selling a business in Florida, WeSellBiz.com™ can help you evaluate the company from the perspective of today’s acquisition market.
Contact WeSellBiz.com™ for a confidential discussion about your business and potential exit.