How Much is My Business Worth?
Are you thinking about selling your business? Buying a business? Or maybe you want to know how much your business is worth. Then you must understand earnings before interest, taxes, depreciation, and amortization (EBITDA) and Seller’s Discretionary Earnings (SDE). Typically, a business is traded (sold) using one of these two methods. This is a business “gray area,” so it is essential to understand your company’s structure before making any decisions on which method to use. Use cautionary judgment.
Use the SDE method for a smaller business. A simple way to draw the line is by looking at whether your business annually brings in one million dollars of revenue. Anything below that number and your business is likely to use the SDE multiple.
There is another way to know if the SDE multiple is for you. Look at how much you, the business owner, are involved in the day to day tasks of the company. If you needed to be out of the office long-term, how much would that hurt your company?
What else tells you to use the SDE multiple? Look at how you use the business account. With SDE, a business owner typically runs personal expenses through their business. These expenses might include personal cellphones, children’s college expenses, etc. It is using the business as your personal checking account. If your business aligns with these ideas, the SDE multiple is likely for you.
If the SDE multiple does not seem to fit your needs, consider the EBITDA multiple. Consider whether any of these things sound like your business. Use the EBITDA multiple when a business has an annual revenue of over one million dollars. The business owner is not the first point of contact. They are not tied to the day-to-day management of the company but have staff in place to run the office. The business typically has standard operating procedures. The business owner does not use the business account for personal expenses. If your business aligns with most of those ideas, then the EBITDA multiple is more likely suited to your needs.
Ultimately, deciding the best way to get a valuation of your company is a complex process. This article is a simplified review to get you started on the right foot. Review the SDE and EBITDA multiples extensively and consult an advisor to further your understanding and get answers for your unique business. Taking that next step will ensure your success as you prepare to buy or sell a company.