How Much is My Business Worth?

The most common way to value a privately held business is as a multiple of last 12 month’s earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted to remove one-time revenues or expenses and to normalize owner’s compensation.

As a simple example – let’s say your business has net income of $3 million, which included expenses of $100,000 in interest, $100,000 in deprecation and a salary for yourself of $500,000. In this scenario, your adjusted EBITDA would be $3.5 million -- $3 million net income, plus $100,000 in interest, $100,000 in depreciation, plus $300,000 to adjust your compensation to a market level (assuming you believe your market rate salary is $200,000.) 

If you hear someone use a term like a “six times multiple,” it generally refers to a valuation that is six times the company’s trailing 12-month adjusted EBITDA. So in the example above, six times $3.5 million is $21 million.

A recent survey by GF Data indicates that the average multiple for middle market businesses sold across all industries is 7.5x adjusted EBITDA. Applying the example above, 7.5 times $3.5 million is $26.25 million.

‍

The appropriate multiple used to value your company is derived from recent sales of comparable companies in your industry, but can vary up or down, based on a range of factors specific to your company, including, for example, revenue and income growth, gross and net margins, historical track record, strength of your brand, competitive position, client base, intellectual property, and a host of other issues.

‍

However, bear in mind that the value of your business as stated on paper using a realistic and appropriate multiple is still a hypothetical amount. The true value of the business is how much one or more buyers will actually pay for your business.

It’s easy to fixate on a price for the business, but terms are just as important as the price. All cash at closing may be more attractive than a higher valuation that includes some delayed or contingent payments such as a note or an earnout. The way the sale is structured can also impact your tax bill, driving after-tax value up or down. Working capital adjustments, escrow, your non-compete, and many other issues can all play a major part in the real value and attractiveness of a transaction.

It's also important to consider that no two buyers will value your business the same way. It's not uncommon to see swings of 30-40 percent of total value between the lowest bidder and highest bidders in a multi-bidder sales process. So the way in which you market and position the business, and find and manage multiple potential buyers is also an important driver in obtaining value for your business. An effective sales process, organized financials, and a credible road-map to grow the company can all help increase value in the eyes of a buyer.  

‍

At Hughes Klaiber we guide entrepreneurs through every step of the process to sell a business, from initial planning to a successful exit.

Please contact us for a confidential call to discuss valuation of your company, current state of the M&A market, how to sell your company, and other items to consider as you make decisions on the future of your company. Schedule a call with us here, or drop us an email.

‍

‍

‍