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Selling & Valuing Your Business 101


Selling your business is not like selling residential or commercial real estate.  With real estate, value is primarily about location, square footage and comparable sales.  If real estate in your neighborhood is selling for $X/per foot, your building will likely sell for $X/per foot, plus or minus 10% to 15% - seldom more or less.  Appraisers value real estate based on its Fair-Market-Value (“FMV”) which is defined as, "The Amount at which a business would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts."

Valuing a business is significantly different.  Business values are based on its Most Probable Sales Price (“MPSP”) which is defined as, “That price for the assets intended for sale which represents the total consideration most likely to be established between a buyer and seller, considering compulsion on the part of either the buyer or the seller, and potential financial, strategic, or non-financial benefits to the seller and probable buyers.”

The difference between FMV and MPSP is that the later takes into consideration the compulsion/motivation, or lack thereof, of the buyer and seller in addition to a large number of other factors that affect value - the primary one being the financial results of the business, absolute value as well as the trend.  At your request, I will email you my list of the 21 Factors Affecting the Salability & Value of a Business.

In determining the value of a business, the business broker calculates the business’ “Sellers Discretionary Earnings” (“SDE”).  SDE is the sum of the business’ taxable income before interest, income taxes, depreciation and amortization (This gets us to EBITDA).  EBITDA plus the owner’s benefits and discretionary expenses charged to their business (owner’s salary, write off of a company car, health insurance, country club membership, boat, contributions, etc.) gets us to SDE - which is typically very much larger than the company’s taxable income.

Most businesses are valued as a multiple of SDE with the base multiple varying by industry.  The business broker will then weight the factors that affect the value and adjust the multiple up or down based on their experience and judgment.  Examples of factors that will value the multiple up are: increasing sales, margins and profits, repeat/referral customers, location, the seller’s willingness to carry a seller note and the business’ upside potential.  Examples of factors that will value the multiple down are:  declining revenue, margins and/or net, customer concentration, competitive threats, short time in business and an above market facility lease rate.

About The Author: You may contact D. Joe Atchison at 951-277-4002 for a no-obligation consultation regarding your business or a business that you are considering acquiring.  Joe is a licensed Business Broker, a Certified Business Intermediary (International Business Brokers Association), a Certified Business Broker (California Business Brokers Association) and is a Certified Public Accountant.


Categories: BizBen Blog Contributor, Business Valuation Issues, How To Sell A Business, Selling A Business


Comments Regarding This Blog Post


Yes, understanding that selling businesses is unique from selling residential property or commercial buildings. I have sold businesses that were previously listed by residential agents who were friends or family of a business owner. It's business malpractice to list a business if you do not actually know how to sell one, even though you have a real estate license. Selling a home or building is different than selling a business, because also, when a person lists a home for sell, they put it in the database, which the whole world can see, because it will auto-populate in many other selling home websites. Selling business, there is a need for confidentiality, because if everyone knows it's for sell, it could hurt the business.

We as business brokers, because we do not have records of what everything sold for in the area, must rely on our expertise of being able to come up with a value for the business. "Rules of Thumb" are just a guide, but there are so many different factors which will lead to the ultimate value of the business.


  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.

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.

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 805-428-2063.

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.

Mike Brewer: Liquor License Brokers, ABC Consulting Services

Liquor license brokerage and consulting services. We provide: Alcohol License Transfers Application Consulting & Processing, Liquor License Purchases & Sales, City Zoning Permits & Land Use Entitlements, Public Convenience or Necessity Findings and Letters. Phone Mike Brewer direct at 800-437-1100.

Mani Singh, Business Broker, Inland Empire

I have successfully represented clients sell & acquire multitude of businesses ranging from Gas Stations, Liquor Stores, Markets, Super Markets, Smoke Shops, Postal Stores, Restaurants, General Retail, Auto and Construction related. Phone me for assistance with selling or buying at 951-296-7646 Cell

Joanne Weber, Broker - Preschool Specialist - Southern California

The Ryan Craig Company is in its 35th year as the recognized expert in Southern California, dealing exclusively in the sale of preschools, Montessori schools, day care centers, and private schools. Our extensive list of references speaks for itself. Phone Joanne at 818-760-3684 for more info.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.


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