How Much Will My Business Sell For?
I’ve dealt with a lot of businesses in a lot of industrial classifications over my career of thirty plus years and I’ve been fortunate enough to meet a lot of great people. I started out as a CPA in public accounting, transitioned to eighteen years as an accounting and financial executive in private industry and then transitioned to my own firm as a business broker, intermediary, business advisor and also a CPA in public practice. This probably gives me a unique perspective in a lot of ways as I spent a lot of time helping build value and now I help establish the sales price of businesses.
There are a lot of sophisticated valuation models out there and a lot of valuators will tell you the eventual value they come up with depends on the purpose of the valuation. That certainly makes valuation subjective and if you were to ask ten different valuation analysts for a value you’d probably get ten different values, although I would hope the majority of those ten would at least be in the vicinity of each other.
The old saying the sales price is what a willing buyer would pay a willing seller with neither under compulsion to complete a transaction and both having knowledge of all of the relevant facts holds true. Beauty is in the eyes of the beholder and value has been and will always be subject to opinion since there is no clear-cut way to value a business.
When it comes to establishing the sales price of a business, the one simple method that always seems to apply in most circumstances is some multiple of recast earnings. In most cases, recast earnings are net income plus owner salary, plus depreciation and amortization, plus interest expense, plus discretionary expenses less normalized capital expenditures. If a business is being sold to someone who will own and operate the business, this is usually the calculation to base the sales price on. For larger businesses with higher recast earnings that are being sold as an investment to a larger company, family office or private equity firm, you would also deduct a reasonable amount for a chief executive or general manager to run the business, and that would also be considered as part of the adjusted recast earnings.
Most small businesses will sell for a multiple of between 2.5 to 5 times the recast earnings, also called owner benefit and seller’s discretionary earnings. By small business, I mean businesses with recast earnings of between $100,000 and $600,000. My experience has been that the lower the recast earnings, the lower the multiple and the higher the recast earnings, the higher the multiple.
Businesses with recast earnings from just under $1,000,000 to just over $3,000,000 will more likely sell for a multiple of 4 to 6, depending on the industry and the business trend.
This is certainly not an exact science and no multiple fits all circumstances. Businesses with a high degree of intellectual property, such as patents for products or technology, do not always fit the price model I’m describing and are beyond the scope of this article. These multiples are also not applicable to real estate rental property. However, most brick and mortar businesses will sell for a multiple of recast earnings and will have a ceiling on their potential sales price. If a business is trending downward, has hit an earnings plateau or is in a really competitive and mature industry, the multiple would be on the lower side of the range. If a business is growing, revenue is on the upswing and the business is in an industry that has the potential for future growth, the multiple would be on the high end of the range.
My purpose is not to tell you everything will sell within a certain range; there are exceptions to everything. If a buyer will pay more, your business will sell for more. My purpose is to help business owners contemplating selling to be realistic. Businesses are usually sold by having one prospective buyer at a time until the right buyer comes along. Buyers will pay a fair price, but they want it to be a realistic price. Buyers don’t get into bidding wars. As a matter of fact, when I’ve told buyers in the past I have someone else interested in a business they do the opposite of bidding; they say they’ll pass and to let them know if the current buyer prospect decides not to pursue it. Buyers also don’t calculate the multiple they’ll pay based on potential; they calculate what they’ll pay based on historical performance.
If you have a business with recast earnings of $1,000,000 and you want $10,000,000 for it, you probably can’t get there. But if you want $5,000,000 for it, then you’re probably on the right track. Selling a business is an emotional decision. Make sure you utilize professionals that can look at it from an unemotional standpoint to advise you and help you through the selling process. It is more complicated than ever before. Most important of all, get an idea of what your business might sell for before you begin the process so you’ll have realistic expectations of the end result.
Greg DeFoor is a CPA, CFE, licensed Business Broker, and the 2015 and 2016 President of the Georgia Association of Business Brokers. For more information call 770-420-8257 or email firstname.lastname@example.org.