Yes, i offer Business valuations.
Why would you want a business valuation? To find out if a company is worth selling or buying.
For the seller, they might want to know what a company will sell for.
For the buyer they might want to know what a business is worth.
Multiple valuation methods
There are multiple ways to value a company. And most of the “rule of thumb” methods, when applied properly, all come to near the same results. As much as we try to make it an exact science, the truth is…
A company is only worth what someone is willing to pay for it.
The AIM approach to valuations
There are 3 main methods for valuing a company.
- Asset valuations
- Income valuations
- Market valuations
Asset based pricing means valuing the company based on what the assets are worth on the open market
Income based pricing means valuing the company based on a multiple of the income it generates.
Market pricing applies to all companies, but only affectst a small segment of companies that are in unusually high or low demand.
Most people value companies based on a multiple of earnings.
Asset value companies – aka Lifestyle businesses
A special note needs to be mentioned about asset value companies. These are companies that are hard to quantify a value beyond their assets. They usually are single owner operators, and often have compensation of less than $100,000 to the owner annually.
These companies are often refered to as lifestyle businesses. Because an “investor” would have to operate the business and choose that lifestyle.
These companies are often only worth the value of the assets if sold in the market.
Its important to note that this segment represents at least 50% of all companies. So it’s not a small segment.
SDE – Sellers Discretionary Earnings.
SDE is a common way to refer to owner operated companies. SDE stands for Sellers Discretionary Earnings. It’s also called owners discretionary, adjusted income, recalculated cash flows, and several other names.
The SDE is basically the net income of the company, plus any owners salary, plus any owners perks the company pays for, plus any depreciation, and few other minor adjustments. Basically it’s the value the owner receives for owning the company.
Companies are sold on a multiple of SDE, meaning the estimated SDE is taken and multipled by that number.
Most SDE companies will be owner operators. (did I say that already?)
A common SDE multiple is 1x to 4x. Something like a CPA firm has a common multiple of 1x SDE (sometimes more or less). An established retail store with staff might have a 2x to 3x multiple. A very well run operation with 20+ staff might have a 4x or higher multiple, but will generally require an SDE of at least $300,000
The average SDE multiple is 2.4x SDE and it includes inventory and all assets required to run the business, but does not usually include the real estate.
EBITDA
Earnings before income tax, depreciation, and amortization. It’s like SDE, but it includes the owners salary. Ebitda valuations usually mean the owner does not manage the company. Otherwise they work just like SDE valuations using multiples. It’s usually 1 point higher in multiple, but of course, it varies.
The average ebtda multiple is about 4.2x
Comparing EBITDA vs SDE multiples
Lets pretend you have a company that makes $300,000 for an owner operator. He might want to sell for a 3x multiple of SDE, or $900,000.
At the same time, if that owner hired a manager at $80,000 per year salary, the owner would make $220,000. With a 4.2x multiple that would be $924,000.
So as you can see, both valuations represent a fairly similar price.
Variations in valuations
Valuations vary. But they give you a fairly accuarate price range. And there are many factos that could alter pricing, like life expectancy of equipment, staffing, demand, rent, management team, risk, and more.
Ultimately your company value comes down to whatever a person will pay.