In the world of small business ownership, your company’s profit is everything. It’s not just a number your accountant shares with you or how much extra you can personally spend. Your business profit is a significant part of how much your business is worth. Understanding a business’s profit is understanding how much to sell a business for.
Profit not only makes you love your business; it also makes people who could buy it fall in love with it.
The Step-By-Step Process of Selling A Small Business
- Know how much to sell a business for (that’s what THIS article is all about)
- Increase the value of your business, before selling (Read More →)
- Build your exit deal team, list the business for sale, meet with buyers and negotiate the deal
Before we dive in…
What Exited Owners Would Do Differently
When I talk with business owners who have sold their businesses, many openly share with me what they would have done differently in the years before their exit. They tell me they wish they had focused less on growing their sales and more on profit margins.
Related Content: 5 Big Exit Lessons From Fresh Heritage’s Founders
Reasons Why You Need to Know Your Business’s Value
There are several situations where having a business valuation is necessary:
- Selling or Merging. Knowing your business’s value helps you set a fair expectation around your selling price. This allows you to negotiate effectively with potential buyers or investors.
- Investment Opportunities. If you are considering buying (a stake in) another business, it is crucial to accurately assess the value of that business to make sure you don’t overpay.
- Performance Measurement. An increase or decrease in the value of your business over time is an indication of how the business is performing. This supports better decision-making.
- Exit Strategy. Business valuations are a crucial step in exiting or planning the exit of your business. Just because your business has value, doesn’t mean it’s sellable. So a business valuation combined with an exit-readiness assessment can help you put your plan in place.
How Much To Sell A Business For
Knowing how much to sell a business for is not easy. Business value depends on your financials, potential for growth, customer relations, and how solid your operations are.
The most common way to calculate the value of a smaller business (defined as < $2M in annual revenue) is to multiply your EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization, a measure of profitability) by a factor (called ‘a multiple’) that's based on industry standards and the unique aspects of your business. This factor is called an ‘ebitda multiple’ and can vary anywhere between less than 1 to more than 10.
More on multiples and the current ones for your industry can be found here.
The Valuation Method Depends On Your Business’s Size
There are several methods for determining how much to sell a business for. The best method for your business is decided based upon the size of your business.
Here’s an overview:
1. Small Businesses or ‘Main Street Deals’ (< $2M in Annual Revenue)
90% of businesses globally generate less than $2M in annual revenue, so we’ll start there.
Companies with under $2M in sales will typically be valued on a Multiple-Based Approach, an Asset-Based Approach or an Income-Based Approach.
Related Content: Turning Near-Collapse Into $1 Million Valuation
2. Lower Middle-Market Companies ($2M – $100M in Annual Revenue)
The rule of thumb for these businesses is that there is no rule of thumb. Valuations could be anywhere between 4 to 15x adjusted EBITDA, depending on a whole list of factors.
3. Publicly Traded Companies (Typically $100M+ in Annual Revenue)
Publicly traded companies trade at a significant premium to that of private market companies. Again, there is no rule of thumb.
Conclusion: The One Metric That Affects Small Business Value
Your current small business value is all about EBITDA. So you know now that building a business isn’t just about making money. It’s about making sure that money is turned into profit efficiently.
Related content:
Understand How Much To Sell A Business For: Know Your Business Value
So if you want to know how much to sell a business for, know this: the higher the profit, the more your small business is worth. It’s as simple as that.
This post was originally published on here
