As a business owner, before you decide whether or not to sell your company with a Business Broker, or Mergers & Acquisitions (M&A) Intermediary, you want to have an idea what your company is worth.  It is very difficult to get a realistic value for what a business is worth for many reasons.

First, there are no two businesses that are alike, and therefore there are no real comparables.  In addition, there are many many "unknowns" regarding the future of any business.  There are other unknowns as well including employees, machines/system, etc.

To get to a ballpark figure, if you have an S corporation with less than 50 employees, and less than $75 million, most buyers will use a number based on the total amount of "benefit" that the owner takes out of the business.  This is called the seller's discretionary earnings, the "adjusted EBITDA", or the Earnings Before Interest Taxes, Depreciation, and Owners Benefit (EBITDO).  This is not a standard number, and almost all buyers will computer it differently.  To attempt an oversimplified definition, it is all the aggregate of all the extras that an owner receives, in addition to their salary and draw.

Most buyers base their bids on a multiple of this cash flow number.  The multiple depends upon the amount of earnings the buyer expects to achieve over the next 3-5 years, and the risk involved in attaining that earnings amount.  The more your business can show a history of steady earnings, and a system that acts as an annuity, the more value a buyer will assign to your company.

Buyers will "multiply" this number by a "multiple" to determine the price they would like to pay for the business.  The multiple numbers range significantly.  Some businesses will sell for a multiple of 1-2.  Other companies will sell for a multiple 4-5, and even higher.  Most companies sell somewhere in the middle, between 3-3.5x's earnings.  Therefore if you can compute the amount of your "adjusted EBITDA", start with a number close to 3-3.5.  Then being honest and objective, what are the risks to the continued success of your business?  How likely is it you (or the new buyer) will continue to grow by 10% annually over the next 5 years?  What are the inherent risks to your business?

Once you have the answer to these questions, you can use that information to determine where you are on the range, closer to 2-2.5, or closer to 3.5-4.  That should give you a ballpark as to what your business is worth on average.

Princeton Capital Strategies, LLC

www.PrincetonCapitalLLC.com

Value Beyond a Business Broker