Updated: Sept 26th, 2023
Every small business owner inevitably asks: "How much is my business worth?" Whether you're contemplating selling, securing capital, or satisfying your curiosity, getting an accurate business valuation can be challenging. Dive into our updated guide on the most popular valuation method: the market method.
Understanding Small Business Valuation Methods
Businesses can be valued using many techniques, like asset, income, and market methods. Our spotlight today is on the latter, renowned for its accuracy when valuing businesses, especially in the context of sales to third parties or M&A transactions in the lower middle market.
Demystifying the Market Method
At its core, the market method operates on the principle of comparability. Here's a simplified breakdown:
Comparable Sales Report: This is an aggregated data report from sales of similar businesses. It's instrumental in deciding the earnings multiple suitable for a business.
Earnings Evaluation: Here, the multiple is applied to one of these earnings indicators:
SDE (Seller's Discretionary Earnings): This includes EBITDA and an owner's salary and perks.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): More prevalent in sizable valuations or deals involving private equity firms.
Valuation Calculation: This equation gives a ballpark of a company's worth. Want to learn more about your business’s value? Try our business calculator to get a snapshot of its value!
Boosting Your Business Valuation
Wondering how to amplify your business's worth? Broadly, it boils down to two factors:
Elevate Earnings Quantity: As your business generates higher SDE, its value surges. Simple as that.
Enhance Earnings Quality: This is intricate but profoundly impactful. Aspiring buyers gravitate towards businesses with diversified, regular income streams and dependable teams. They often seek roles as overseers rather than day-to-day operators. If your business aligns with these preferences, your valuation can skyrocket.
Occasionally, it's not feasible to boost earnings volume. In such cases, focusing on the quality of earnings is paramount. Still trying to figure out where to start?
Exit Factor, our sister company under our Prospere Companies private investment firm, specializes in helping small to mid-size business owners prepare and sell their businesses for maximum value. With a focus on optimizing financials and providing expert guidance, Exit Factor empowers entrepreneurs to navigate the complex process of exiting their businesses successfully.
Conclusion: Let's Unravel Business Valuation Together
Business valuation can seem daunting. But with the correct information and assistance, it becomes manageable and meaningful.
Are you eager to delve deeper into valuation intricacies or keen on enhancing your business's worth? We're here to help. Reach out to one of our expert brokers today!