In order to sell your business, you must first determine its worth. What will be your asking price? How is this price calculated? Do you have supporting documentation for the price? The factors surrounding your business’s value can be as simple as your annual profits to as complex as its overall market standing for the industry. There are a number of ways to determine your company’s worth; an experienced broker can help you decide which one is the most beneficial for you.
Seller’s Discretionary Earnings
A Seller’s Discretionary Earnings (SDE) is a method of valuation based on total cash flow. A company’s cash flow includes employee salaries, benefits, and depreciation and amortization of non-cash items (i.e., equipment, machinery, etc.). Unlike other methods of valuation, SDE is considered more informal and is done for smaller businesses that have gross annual sales under $1,000,000.
SDE requires the calculation of both actual and real expenses (i.e., utilities, rent, labor, auto expenses, etc.). If there is any expense related to the day-to-day operations, it should be included.
EBITDA Business Valuation Multiplier
On the other hand, for businesses that have net annual earnings above $1,000,000, the EBITDA multiplier is often used. By definition, this multiplier uses the market values of related businesses in your industry to determine the valuation of your specific company.
EBITDA requires the calculation of business taxes, the effect of capital structure used for financing the daily business operations, and cost recovery of investments.
Free Business Consultations at Transworld Business Advisors of Houston
Transworld Houston offers free business consultations with experienced brokers. After talking with you about your business and its unique characteristics, an advisor from Transworld Houston can help you choose the appropriate valuation method for your specific business. If you are interested in determining your business value before deciding if it is time to sell, contact Transworld Business Advisors of Houston today!