In general, the average revenue is around $44,000 per year for a company with a single owner/employee. Two-thirds of these small businesses make less than $25,000 per year.
Determine the right multiple.
For example, if a company has SDE of $150,000 and it sold for $300,000, it sold for 2x seller's discretionary earnings. The typical range for a small business is 1.5 to 3x SDE. Higher earnings, fast growth, and stellar margins can all help to increase the multiple.
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.
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.
Factors affecting small business valuation
Thus, buyers have to approach the deal as if they are purchasing a job. Businesses where the owner is actively-involved typically sell for 2-3 times the annual earnings of the company. A business that earns $100,000 per year should sell for $200,000-$300,000.
Current Value = (Asset Value) / (1 – Debt Ratio)
To accurately ascertain a business's value efficiently, calculate its total liabilities and subtract that figure from the sum of all assets—the resulting number is known as book value.
However, for businesses that turn over less than $5 million per annum, around 80% of them that sell, do so for less than 3 times the EBIT (or profit), whilst businesses that turn over less than $1 million are lucky to sell for 2 times EBIT.
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. However, because it works like a snapshot of current value it may not take into consideration future revenue or earnings.
So as an example, a company doing $2 million in real revenue (I'll explain below) should target a profit of 10 percent of that $2 million, owner's pay of 10 percent, taxes of 15 percent and operating expenses of 65 percent. Take a couple of seconds to study the chart.
Because selling your business is such a complicated process, It can take an average 6-9 months to sell a small business, and many don't end up selling. Many small business owners have a lot on the line, as 80-90% of their net worth is tied up in their business.
What is the average net worth of a small business owner? The median net worth of self-employed families was $380,000 in 2019, according to JP Morgan Chase & Co. The average net worth of a family of wage earners is around $90,000.
AOV is calculated by dividing the total revenue generated from all orders by the number of orders placed during a specific period. For example, if a store generates $10,000 in revenue from 100 orders in a month, the AOV would be $100.
Fair market value is the number that reflects what the business would be valued in a sale between a buyer and seller who both have full knowledge of the facts and are under no duress. Basically, it's the number that you'd expect to see if you put your business out into the marketplace.
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.
Main Street Deals (Sub $3m Revenue)
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). Smaller companies that are even more owner-reliant will even be lower than that.
Asset-Based Valuation is a method used in company valuations to determine a company's worth based on its tangible assets. This approach calculates the company's value by summing up the value of its assets and subtracting its liabilities. Tangible assets may include property, equipment, inventory, and investments.
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.
Middle class is defined as income that is two-thirds to double the national median income, or $47,189 and $141,568. By that definition, $100,000 is considered middle class. Keep in mind that those figures are for the nation. Each state has a different range of numbers to be considered middle class.
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.
Asset-Based Valuation
Description: This method determines a business's value based on its net assets. It calculates the value by subtracting liabilities from the business's total assets. Methods: Book Value: Relies on balance sheet values, a straightforward method that may not reflect true fair market asset values.
The 1% Rule is simply this - focus on growing your business by 1% every day, and compounded, means your business gets 3,800% better each year. Sir Dave Brailsford, former performance director of British Cycling, revolutionized cycling using this theory.
The Net Book Value (NBV) of your business is calculated by deducting the costs of your business liabilities, including debt and outstanding credit, from the total value of your tangible and intangible assets.