"What is my business worth?" is the first question almost every owner asks. The honest answer: whatever a qualified buyer will pay and a lender will finance. Here is how brokers get to a realistic number.
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Start with earnings, not revenue
Buyers pay for cash flow. For most owner-operated businesses, brokers use seller's discretionary earnings (SDE): net profit plus the owner's salary and benefits, interest, depreciation and one-time or personal expenses run through the business. Larger companies with a management team in place are usually valued on EBITDA instead.
Apply a multiple
The value is typically SDE or EBITDA times a multiple. The multiple reflects risk: the more predictable and transferable the earnings, the higher it goes. It varies widely by industry, size and market conditions, which is why comparable sales matter more than rules of thumb.
What raises your multiple
- Clean, reconciled books that match your tax returns
- Revenue spread across many customers
- A team that runs day-to-day operations without you
- A long or renewable lease at a reasonable rent
- Recurring or contract revenue and steady growth
What lowers it
- Heavy dependence on the owner's personal relationships or skills
- One or two customers making up a large share of sales
- A lease that ends soon with no renewal option
- Cash income that isn't reported, because buyers and lenders can't count it
- Deferred maintenance on equipment
Will a lender back the price?
Most buyers finance with an SBA 7(a) loan, so the business's cash flow has to cover the new debt with room to spare. A price the numbers can't support usually doesn't close.