If you’re trying to figure out what your business might be worth, it’s helpful to consider what acquirers are paying for companies like yours these days.
A little internet research will probably reveal that a business like yours trades for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.
Obsessing Over Your Multiple
This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can jack it up. After all, if your business has $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.
Obviously, your multiple will have a profound impact on the haul you take from the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying.
DID YOU KNOW?
The Quality Of Your Lifestyle & Value Of Your Company Have One Major Thing In Common.
They Are Both Dramatically (Negatively) Affected By Your Business’ Dependence On You.
When your own company requires your direct involvement and your name fills multiple circles in your organizational chart, you know firsthand what that leads to — burnout and stress.
Furthermore, no one else would want to buy such a business, regardless of how much profit it generates, because acquirers want to buy a business system, not a job.
Fortunately, there is a proven methodology for systematically increasing the value and “sellability” (a huge benefit even if you have no plans to sell) of your company, thereby increasing the quality of your lifestyle and level of personal freedom you experience every day, by transforming your company into a self-managing income-producing asset that can thrive without you.
It’s call The Value Builder System.
The first step toward this freedom is to get your Value Builder Score to see where you currently stand.
Companies that score 80+ typically have valuations 71% higher than the average scoring (59/100) business.
Complete the 18-minute questionnaire and instantly get your score out of 100 possible points.
How Profitability Is Open To Interpretation
Most entrepreneurs think of profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.
This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.
Let’s take a simple example to illustrate.
Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year. You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.
You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business. This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.
Some of the most common adjustments relate to rent (common if you own the building your company operates from and your company is paying higher-than-market rent), start–up costs, one-off lawsuits or insurance claims and one-time professional services fees.
Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of extra money can be made when selling your business.