How to find out what your business is very valuable
Decide the real value, or a fair market value, from business is truly art and science. Like anything that is sold with the real value is the buyer who is ready, want, able to pay on the open market.
It’s said, as the owner, you are your operational expert and you will know better than others. Often because you know everything about your company, this can cause you to feel that your company is very special so it must be worth more than other businesses. And this is what causes many owners to place high-value artificially in their business.
To help you as the owner, understand the market value fair, let’s see how the business is valued by professional assessment (and lenders).
The business is considered based on comparing it with other companies / opportunities with the same size and cost.
The most common factors used to assess the business are based on the seller’s discretionary income (SDE).
SDE is based on business profits with factors such as depreciation, interest, amortization and salaries of owners who add back to profit and all costs normalized for business. Professional business brokers, assessment experts, or lenders will calculate this number.
This number (SDE) is then used to calculate the selling price. Practical rules are 1 to 3 times SDE results in the selling price. Attract every business owner want their business to be at level 3, but most of it is around 2 and some lower.
Now, in large companies, EBITDA (profit before interest, tax, depreciation and amortization) are used. There is a difference between SDE and EBITDA with salaries and normalization of sellers not included in EBITDA. Therefore where SDE is a 1-3 factor, EBITDA is a factor usually 3-5. Often these numbers are very similar when calculated.
To accurately set a fair market value, an assessment must be carried out by a qualified professional. Assessment is often charged $ 2500 – $ 10,000 or more depending on its business. For many sellers, this provides peace of mind that they get a fair market value for their business.
Selling business is an emotional decision and the biggest reason for the business that is not sold is that business is more than priced. So to help you prevent your business from selling, be sure to do a business assessment before you try to sell business.