Small Business Valuation Multiples Simplified

October 11, 2022
Business valuations

Small Business Valuation multiples.

One standard method of valuing a small business is to use valuation multiples.

Valuation multiples for a small business are a method of comparing your business to other businesses in your industry that have been recently sold.

The following are some common valuation multiples for small businesses:

Retail: 0.5 – 1.5 times EBITDA
Restaurants: 0.5 – 2.0 times EBITDA
Manufacturing: 0.5 – 3.0 times EBITDA
Service businesses: 1.0 – 4.0 times EBITDA
Software-as-a-service: 4.0 – 8.0 times EBITDA

Source: Pepperdine Private Capital Markets Report

If you’re thinking of selling your small business in California, you’re probably wondering how to value it.

Most importantly, you want to get a reasonable price for all your hard work in building up your business from scratch.

But where do you start?

By looking at the sale price of similar businesses, you can get a rough idea of what your business might be worth.

Types of Valuation Multiples.

There are several different types of valuation multiples that you can use to value your small business.

The most common are:

Earnings Multiples.

This type of valuation multiple examines your business’s earnings before interest, taxes, depreciation, and amortization (EBITDA) and compares them to the business’s sale price.

For example, if your EBITDA is $1 million and similar businesses in your industry are selling for an average of six times EBITDA, then your business value would be $6 million.

This type of valuation is best for a small business that is profitable and has a history of consistent earnings.

If your small business is new or has been struggling to make a profit, this type of valuation may not be as accurate.

Sales Multiples.

Another common type of valuation multiple is the sales multiple.

This one simply looks at your business’s total sales and compares them to the sale price of the business.

For example, if your business did $5 million in sales last year and similar businesses in your industry are selling for twice their sales, then your business value would be $10 million.

It is best to use this type of valuation if you are in the early stages of your business or if you are not profitable yet.

Asset Multiples.

Asset multiples are sometimes used to value businesses that possess a significant amount of physical assets, such as equipment or real estate. If you are a distribution company, this is a good starting point for a valuation.

To calculate this type of valuation multiple, simply take the total value of all your assets and divide it by the sale price of the business.

For example, if your assets are worth $3 million and you’re selling the business for $5 million, then your asset multiple would be 0.6.

Price-Earnings Ratio.

The price-earnings ratio (P/E ratio) is a valuation multiple that’s often used to value publicly traded companies, but you can also use it to value privately held companies.

To calculate this multiple, simply take the current stock price of a publicly traded company and divide it by its earnings per share (EPS). EPS can usually be found on a company’s income statement.

For example, if Company XYZ trades at $100 per share and its EPS is $2, then its P/E ratio would be 50 ($ 100 ÷ $2).

Final Take.

Small business valuation multiples are used to guide an accurate assessment of your company’s value.

While they’re not an exact science, they can give you a ballpark estimate of what your business might be worth.

Keep in mind that other factors can affect the value of your business. This includes its location, growth potential, developments in the local economy, changes to tax laws, and, of course, profitability.

If you need help with determining your company’s worth, schedule a free consultation with Andrew Rogerson. He can help you determine the best way to value your company and maximize its value.

Do you have any questions about valuing a company? Leave a comment below and we’ll be happy to help!

Conclusion.

Using the best valuation formula to determine your biggest asset’s worth, as well as the decision to exit business ownership, is a significant life event. There could be plenty of emotions involved.

When you collaborate with a business brokerage firm in California, it will provide all the solutions and insights necessary to get the most out of the business sale.

There are only a few ways to sell and value a business quickly in California, and an experienced business broker like Andrew Rogerson can guide you through the best strategy.

It is currently the perfect storm to value and sell your business in California. With the Great Resignation, which began during the pandemic and is expected to continue through 2023, there is no shortage of experienced and well-financed buyers looking for the next opportunity to seize.

With a Lifetime Certified Business Intermediary by your side, we are confident that you will sell your business in California quickly and at the highest possible price.

Andrew Rogerson is a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700. If you prefer, email him at support@rogersonbusinessservices.com. Andrew services the whole state of California.

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Small Business Valuation Multiples Simplified