One of the simplest ways of determining the ideal selling price of a business entails finding out what comparable companies in the exact location are going for. Analyzing the value of the business assets and liabilities can also make it easy to determine the best-selling price.
You just need to look at your company's balance sheet. A balance sheet has all the assets and liabilities of a business, indicating its worth. Depending on the type of business you own, the list may include tangible and intangible assets and various long-term liabilities.
90% of American businesses generate less than $3m in annual revenue, so we'll start there. Companies with under $3m in sales will typically sell for 2.5 – 3.5 X their discretionary earnings (total cash the owner could take out of the company).
For example, a business that is doing $300,000 in profit per year sold for at 2.44X would have a sale price of $732,000 ($300,000*2.44=$732,000). This works in reverse as well — if a business sold for $732,000 at 2.44X, then ($732,000/2.44) means the profit was $300,000.
Current Value = (Asset Value) / (1 – Debt Ratio)
To quickly value a business, find its total liabilities and subtract them from the total assets. This will give you an idea of its book value. This formula estimates the worth of a business by looking at its assets and subtracting any liabilities.
To find the fair market value, it is then necessary to divide that figure by the capitalization rate. Therefore, the income approach would reveal the following calculations. Projected sales are $500,000, and the capitalization rate is 25%, so the fair market value is $125,000.
A business in California might sell 2 to 3 times the seller's discretionary earnings. The fair market value is what the business would sell for on the free market.
Most small businesses generally sell at 2-3 times their seller's discretionary earnings. According to NYU Stern, industry subsectors can have different revenue multiples. For example, the real estate development subsector has a 4.38x multiple, while real estate operations and services sell at a 1.51x revenue multiple.
The Revenue Multiple (times revenue) Method
A venture that earns $1 million per year in revenue, for example, could have a multiple of 2 or 3 applied to it, resulting in a $2 or $3 million valuation. Another business might earn just $500,000 per year and earn a multiple of 0.5, yielding a valuation of $250,000.
The revenue multiple is the key factor in determining a company's value. To calculate the times-revenue, divide the selling price by the company's revenue from the past 12 months. This ratio reveals how much a buyer was willing to pay for the business, expressed as a multiple of annual revenue.
EBIT multiples can range from 0.8 times FME to over 5 times, depending upon the industry, performance, and relative risk of the subject business.
Using findings from a private company's closest public competitors, you would determine its value by using the earnings before interest, taxes, depreciation, and amortization (EBITDA), also known as enterprise value multiple.
Following is the step-by-step procedure to calculate the selling price per unit: Identify the total cost of all units being bought. Divide the total cost by the number of units bought to obtain the cost price. Use the selling price formula to find out the final price i.e.: SP = CP + Profit Margin.
Market-based approach: This method compares the business to similar businesses that have been sold recently. To use this approach, research the sale prices of similar businesses and adjust for any differences in size, industry, location, and other relevant factors.
Take your total assets and subtract your total liabilities. This approach makes it easy to trace to the valuation because it's coming directly from your accounting/record keeping.
How can one find out how much a company was bought for? If the acquirer or the target is a public company, you will typically be able to mine information on the transaction from SEC filings on sec.gov. Simply search for filings by the public company ticker.
A 2023 survey of over 1,000 small business owners revealed 34% have a revenue of less than $50,000 and only 9% have a revenue of over one million dollars. Despite their size, small businesses generate a remarkable 32.6% of the known value of U.S. exports.
BROKER'S FEES
Fees are typically paid by the seller, so this will not affect your cost of buying an existing business.
The minimum acceptable price is a price that manufacturers may ask retailers to sell or advertise their products for.
Using this basic formula, a company doing $1 million a year, making around $200,000 EBITDA, is worth between $600,000 and $1 million. Some people make it even more basic, and moderate profits earn a value of one times revenue: A business doing $1 million is worth $1 million.
Common Multiples
Service businesses: 1.5 to 3.0 (i.e., cash flow x 1.5-3.0 multiple) Food businesses: 1.5 to 3.0 (i.e., cash flow x 1.5-3.0 multiple) Manufacturing businesses: 3.0 to 5.0+ (i.e., cash flow x 3.0-5.0+ multiple) Wholesale businesses: 2.0 to 4.0 (i.e., cash flow x 2.0-4.0 multiple)
Car Dealerships – dealers often cite 'Blue-Sky' multiples, being the amount of goodwill value of the dealership. 'Blue-Sky' value is calculated as pre-tax income multiplied by the 'Blue-Sky' multiple which is typically derived from industry publications and informed by precedent transactions.