Small Business Valuation Multiples Simplified
One common method of valuing a small business is to use valuation multiples.
Valuation multiples for a small business are simply a way of comparing your business to other businesses in your industry that have been sold recently.
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 good 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:
This type of valuation multiple looks at your business’s earnings before interest, taxes, depreciation, and amortization (EBITDA) and compares it to the sale price of the business.
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 could be valued at $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.
Another common type of valuation multiple is the sales multiple.
This one simply looks at your business’s total sales and compares it 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 two times sales, then your business could be valued at $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 are sometimes used to value businesses that have a lot of physical assets, such as equipment or real estate. If you are a distribution company, this is a good valuation to get started on.
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.
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 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).
Small business valuation multiples are used to guide an accurate appraisal of your company.
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, what’s happening 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.
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Do you have any questions about how to value a company? Leave a comment below and we’ll be happy to help!
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 toward getting 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 that started during the pandemic and the trend to continue till 2023, there are no shortages of experienced and well-financed buyers looking for the next opportunity to grab.
With a certified business intermediary at your side, we feel confident that you will sell your business in California quickly and at the highest 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 firstname.lastname@example.org. Andrew services the whole state of California.
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