Valuing Your Business

What Is My Business Worth?

There are a number of methodologies used by business appraisers in valuing a business.  However, we believe that the ultimate value of a business is what a qualified buyer is willing to pay for it.

Aside from the many subjective factors in valuing a business, there are four key elements to determining what a qualified buyer would be willing to pay:

  • The cash flow generating capacity of the business.
  • The year-over-year volatility of this cash flow.
  • The value and maintenance expense the assets used in the business.
  • The financing options available to a qualified buyer.

Seller’s Discretionary Earnings

The cash flow generating capacity of a business is typically measured by Seller’s Discretionary Earnings (SDE).  SDE represents the total cash flow available to the business owner, and is typically greater than pre-tax net income.  For example, SDE includes owner’s salary, which is a form of income to the business owner and is expensed to the business.  SDE also includes personal expenses that are run through the business that are a a form of in-kind income, such as automobile expenses.  And SDE includes any expenses that generate cash on an after-tax basis such as depreciation, amortization and interest expense.  Privately held businesses are typically valued based on a multiple of SDE.

The purchaser of a business is acquiring an income stream.  In some cases, the acquirer of a business is actually buying himself (or herself) a job.  In any case, the greater the SDE, the more the business is worth.  Privately held businesses that change hands for $1 million or less typically trade at a multiple of SDE between 1.5 and 3.5.  The multiple is determined by various factors, including the four main factors listed above.  Generally speaking, turn-key, absentee-owned businesses sell for a higher multiple of SDE than businesses where the owner is essential to the day-to-day management of the business.

Wonder no more.

Contact VR Business Brokers for a free, no-obligation estimate of the value of your business.

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