The value of the small business is mostly determined by the cash flow (or business brokers use the term "Seller's Discretionary Earnings" instead to be more accurate). Seller's Discretionary Earnings (SDE) is defined as net income before taxes (operating income); interest; depreciation and amortization; owners compensation; owners benefits; and non recurring expenses.
Most small businesses sell for 1.5 - 3.5 (multiples) times the yearly SDE, depending upon the value factors of the business. Things that determine the multiple or value factors are the stability of historical earnings; business & industry growth; type of business (service with few assets to manufacturing with significant assets); location & facilities; stability & skill of employees; competition; diversification of products, service & geographical markets; desirability of the business; depth of management; and terms of the sale. The national average is 2.76 times SDE.
The inventory, equipment or fixtures are included in the price because they are what is required to generate the SDE. Some businesses need inventory, some need equipment (assets) and some need both, depending on the type of business. The amount of assets is one of the criteria that helps determine the value a business.
Some value (but not too many small business brokers) the business by its EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization. The multiple that is used is generally in the area of 4 to 6 times EBITDA. EBITDA is mostly used by investment bankers or M&A folks, people who usually handle bigger stuff ($ 20 million+ price tag).
Business brokers count owner's compensation and owner's benefits as part of earnings or SDE (Seller's Discretionary Earnings). You can also define SDE as EBITDA plus owner's salary plus owner's benefits. Basically, if you take SDE times 1.5 to 3.5 multiple, you should have similar numbers if you calculate EBITDA times 4 to 6 times.
The reason business brokers don't usually go by EBITDA times 4 to 6 times is that, it's basically the owner's discretion to pay him/herself salary of whatever the amount and most owners write off a lot of personal expenses through the business (called owner's benefits).
This is one of the worst times to sell a business right now. No bank financing is available these days so multiples are down, demand is down and a lot of buyers are cash strapped. I tell sellers if you don't absolutely have to sell, then maybe he/she should hold off. No one knows when the economy will turn around but it eventually will and once bank starts lending again, multiples of businesses should slowly inch up again.
Below is a list of documents that a typical business broker needs in order to package a business for sale;
1) last three years of profit & loss statements including balance sheet
2) last three years of tax returns
3) copy of the lease
4) major fixture, furniture & equipment list
These days, selling a business is a tough task. If your business does sell, it takes an average of 3 - 6 months to find a buyer. And after negotiating the price, seller and buyer will go through due diligence and then escrow.
There are buyers out there for good, solid businesses - perhaps even more so now, so good luck!
About The Author: Ron Hottes is with Business Team - a business brokerage team of 28 highly skilled and seasoned professionals within Los Angeles. Our business brokers have over 100 years of cumulative experience and the expertise to help you buy or sell a business in the Los Angeles County area. Ron can be reached at 310-539-8300.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses
Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.
|Diane Boudreau-Tschetter: Escrow And Bulk Sale Services
California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.
|Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services
Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 800-864-0420.
|Helen Yoo: Escrow & Bulk Sale Services - Southern California
New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.
|Rick Carlson, Business Broker - Southern California
You Will Never Feel Lost In The Shuffle. Many Brokers Simply Send Out An NDA And That's The End Of Communication. All Buyers Receive A Personal Meeting With An Ace Acquisition Specialist So They Can Recommend The Perfect Business For You. Phone Rick direct at 800-985-4939.
|Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area
Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.
|Joe Ranieri, Business Broker, Orange County Area
Having owned retail/restaurant businesses for over 20 years, my interest turned to listing and selling businesses rather than owning them. I specialize tend to specialize in Orange County high volume restaurants, fast food independents and chains, bars and liquor stores. Call 714-292-5448.
|Joel Miller, Broker Specialist, Elderly Care Services
Senior Care Services Specialist - Business Broker, Consultant, Due Diligence: Elderly Care Homes, Assisted Living Homes, Adult Residential Facilities, Hospice, Congregate Living, Independent Living, Care Services. Areas: San Diego County, Orange County, Inland Empire. Joel Miller at 619-866-4310.
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