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Unveiling the Hidden Potential: A Guide to Business Valuation and Informed Decision-Making

Updated: Jul 31, 2023

Unveil the Hidden Potential in Your Business Valuation and Plan a Brighter Future with Informed Decisions.


Understanding the value of a small business is crucial, whether you're planning to sell it or looking to buy one. Valuing a business accurately enables you to make informed decisions, attract investors, and set the right price for potential buyers.

Grasp the Basics of Business Valuation: Valuation is the total worth of your company, calculated using a specific formula that takes into account assets, earnings, industry, and any debt or losses. For small businesses, "Seller's Discretionary Earnings" (SDE) is commonly used instead of EBITDA (earnings before interest, taxes, depreciation, and amortization). SDE includes the owner's salary and benefits, which are significant for small businesses.


Organize Your Finances: Proper financial records are essential for accurate valuation. Get all relevant documentation in order, including profit and loss statements, tax filings, and business plans.


Take Stock of Your Assets and Liabilities: List all tangible and intangible assets that add value to your business, such as real estate, equipment, patents, and brand reputation. Identify liabilities, such as debts, accounts payable, and accrued expenses, which decrease the overall value.


Research Your Industry: Knowing your industry's trends and comparable businesses (comps) is vital. Understanding the SDE multiple for your industry helps you assess your business's value and stand out in the market.


Approaches to Business Valuation:


a. Income Approach: This method calculates the expected future income of a business. Two commonly used valuation methods are the discounted cash flow method (for high-growth potential but not yet profitable businesses) and the capitalization of earnings method (for established businesses with stable profitability).


b. Asset-Driven Approach: This method attributes value based on the business's assets and liabilities, adjusted to their fair market values. It's useful for businesses with significant investments or real estate.


c. Market Approach: This method determines a business's value based on the purchases and sales of comparable companies in the same industry, providing insights into local market trends.


Valuing a small business requires objective analysis and financial acumen. Whether you seek professional help or use online resources, understanding the value of your business empowers you to make strategic decisions for its future and potential exit strategies.


Remember, a well-informed valuation will lead to more successful transactions and long-term growth.


Valuation Multiples by Industry

The tables below summarize earnings and revenue multiples based on sales of businesses on the BizBuySell. These figures are valuable as relative indicators of small business values but should not be relied upon to value a specific business.


About this Data

All data is an aggregation of sales reported during a trailing five-year period, and is updated bi-annually. Current data is based on businesses sold from Q3 2018 through Q2 2023.


Cash flow and earnings multiples represent Sellers Discretionary Earnings (SDE) as reported by the business owners or business brokers closing the sale listing, divided by reported sales price. Revenue multiples represent gross revenue or gross sales reported, divided by reported sales price.


Prices of Reported Business Sales

The median sale price of the data set is $292,000, rising to $325,000 for the first half of 2023. The majority of businesses in the data set sold for less than $1,000,000 - putting these multiples in the "main street" segment of small businesses.


Quarterly Trends

Median small business sale prices – and associated valuation multiples – rose through 2022 due to supply constraints and the economic climate caused by the Covid-19 pandemic. Increasing interest rates have reigned in prices through the first half of 2023.


Average Revenue and Earnings Multiples by Industry

Average industry earnings multiples range from 1.95 to 3.2, with the average across all industries at 2.44. Revenue multiples range from 0.4 to 1.2, with the average across all businesses at 0.62.



Industry

Average Revenue Multiple

Average Cash Flow (Earnings) Multiple

Median Sale Price

0.66

3.01

$425,000

0.49

1.95

$120,000

0.54

2.48

$663,500

0.77

2.29

$295,527

0.83

3.03

$312,500

0.83

2.53

$302,500

1.17

2.43

$400,000

0.41

2.12

$190,000

0.72

2.62

$350,000

0.73

2.96

$700,000

1.08

3.21

$690,000

0.69

2.36

$187,000

0.47

2.45

$250,000

0.76

2.38

$290,000

0.63

2.09

$150,000

0.53

2.71

$425,000


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How To Use Multiples in Business Valuations

Business valuation multiples are used to benchmark the value of a business on the open market. By comparing a business for sale to other, similar businesses that recently sold in the same market, a market value can be estimated.





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