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|
|Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence
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 & Bulk Sale Services - CA
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.
|Shalonda Chappel-Pilgram: Escrow & Bulk Sale Services - Southern California
Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.
|Helen Yoo, New Century Escrow - Escrow Services In 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.
|Lee Petsas, Business Broker - Southern California Area
Lee Petsas has been selling businesses with UBI Business Brokers in Southern CA since 1981. In 1999 he became the Owner and Broker for UBI. He has been approved multiple times by Courts as an Expert Witness in the area of Business Valuations.
|William Park, Business Broker - Southern California
Highest Volume Broker in California, Simply Check our HUNDREDS of Listings! Over 25 Associates, Speaking Dozen Languages, Helping Buyers and Sellers of Small Business since 1982, Centrally Located between Los Angeles and Orange Counties, while Riverside & San Bernardino Counties are Very Accessible.
|Bob Baumgarten, Business Broker: Southern California
National Business Brokerage is a full service brokerage company that has been serving buyers and sellers of Southern California businesses since 1994. We are dedicated to providing the highest standards of professional service for our clients. Phone Bob direct at 949-588-8727.
|Bob Hughes, Business Broker: Coachella Valley Area
Bob Hughes is a business broker & is President of Hughes Properties. Hughes has a wide variety of entrepreneurial experience with the personal ownership & sale of numerous businesses, and has sold over 200 small & mid-sized businesses in the Riverside County marketplace. Call Bob at 760-323-8311.
|Related Articles, Events, Blog Posts, Discussions, Videos, Interviews|
|FREE Sat Seminars: Best Practices When Buying Or Selling A Small Businesses
This seminar focuses on the process of buying & selling a small business. Sat's - Monthly (refreshments will be served) in Southern California. Phone Willard Michlin (CPA, Certified Fraud Examiner, Due Diligence Expert, Business Broker). Phone 805-428-2063 to RSVP. Click On Link For Schedule.
|Bob Hughes Discusses: Due Diligence Considerations Before Buying A Business
Coachella Valley business broker Bob Hughes (760-323-8311), discusses the need for due-diligence and items that should be collected & investigated by the buyer during this critical process of buying a small business. Read his latest blog post on due diligence considerations before buying a business!
|Getting An SBA Loan To Buy A Small Business: Dispelling Some Major Myths
When seeking SBA loan financing many potential business buyers have wrong information about the process of securing the best financing to buy a business. Peter Siegel, MBA (at 925-785-3118) a business purchase financing expert delves into the myths and facts regarding SBA loan financing.
|Deposits With Business Purchase Agreements: How Much? Structure? Refundable?
Purchase agreements when buying or selling a small business can be tricky. A top Southern CA Business Broker discusses this topic including multiple strategies regarding deposits with business purchase agreements. Lee Petsas (Orange County Business Broker) at 714-363-044 contributes this blog post
|Going Behind A Brokers Back: How Does A Broker Protect Themself?
What are some ways a broker can prevent a buyer and seller from doing a deal behind their back and what to do about it if it happens? Joe Ranieri (Orange County Business Broker) discusses ways a business broker or agent can protect themselves from buyers and sellers trying to circumvent them.
|Differences Between Business Appraisers, CPA's, And Due Diligence Experts
What are the differences between a Business Appraiser, CPA auditor and Due Diligence Expert - and why should you care? Insights from Willard Michlin, CPA in his latest BizBen blog post that will be useful for someone engaged in, or planning to conduct due diligence in the future
|Due Diligence Issues: What Business Buyers Should Know About The Process
Willard Michlin, CPA, CFE at 800-864-0420 elaborates why you can do a large portion of the due diligence yourself, depending on your background, but you should never try to do it solely on your own. In this BizBen blog post he explores ways business business buyers get themselves into trouble.
|Purchase A Business With Limited Or No Cash - Financing Tips For Buyers
Purchasing a business with no money down can be difficult, but not impossible. Financing a business purchase or down payment can often be accomplished with these strategies from Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program Advisor with BizBen) at 925-785-3118.