Have you decided to sell your business? It is quite a monumental step in your business journey, filled with excitement and uncertainty.
As you contemplate a business sale, a pressing question looms…
“How much can I sell my business for?”
But this is not just a question of numbers; it’s about recognizing the value of your hard work and ensuring the legacy you’ve built is appropriately and fairly valued. Let’s embark on this journey together, understanding how to value your business and how to maximize your returns.
Understanding Your Business’s Worth
The selling price of a business often falls between two to four times the seller’s discretionary earnings (SDE).
For instance, if your business has an annual revenue of $200,000, you can expect a selling price ranging from $400,000 to $600,000. Determining your business’s market value is the first crucial step in the process.
Let’s dive a little deeper.
Understanding the Fair Market Value
Fair Market Value (FMV) helps owners who are planning to sell understand the worth of the business. It represents the price a business would sell for on the open market, assuming the buyer and seller are reasonably informed about the asset and neither is pressured to buy or sell. Essentially, it’s the price that your business could realistically fetch if sold today.
Let’s explore the concept of fair market value with a relatively straightforward example. Mary has run a successful specialty coffee shop in downtown Chicago for several years. After putting in much hard work and growing her business, Mary decides it’s time to sell and move on to new challenges. This example will help us understand how fair market value works and how it’s important to determine what a business like Mary’s is worth.
Mary’s Coffee Shop has an annual net profit of $300,000. She pays herself a salary of $100,000 and has additional owner-specific expenses of $15,000. To calculate the fair market value, she uses the industry-standard multiplier, which in her case is 2.5. Her business’s fair market value would be calculated as follows:
($300,000 + $100,000 + $15,000) x 2.5 = $1,037,500
This value becomes the cornerstone of Mary’s business selling journey, guiding the negotiations and conversations she will have with potential buyers. It gives Mary a realistic expectation of what she can achieve in the sale, ensuring she enters discussions informed and prepared.
A Breakdown of Industry Multipliers
Here is a general guide to some standard and current industry multipliers as of April 2023. However, keep in mind that these figures can fluctuate and should be verified with current market data:
Technology and Software: 3.5 – 5.5
Healthcare and Biotech: 3.0 – 4.5
Manufacturing: 2.5 – 4.0
Construction and Engineering: 2.0 – 3.5
Retail: 2.0 – 3.0
E-commerce: 3.0 – 4.5
Professional Services (Law firms, Accounting firms): 1.5 – 2.75
Restaurants and Food Services: 2.0 – 3.0
Real Estate: 3.0 – 4.0
Transportation and Logistics: 3.0 – 4.0
Hospitality (Hotels, Resorts): 2.5 – 4.0
Automotive: 2.0 – 3.0
Wholesale and Distribution: 2.0 – 3.5
Energy and Utilities: 3.0 – 4.5
Agriculture: 2.0 – 3.5
Factors That Influence the Industry Multiplier
In understanding the multiplier, which is central to calculating the Fair Market Value, it’s important to recognize that it’s not a static figure. Instead, it’s shaped by various factors:
The sector your business operates in significantly influences the multiplier. For instance, companies in rapidly growing industries or sectors known for their stability often have higher multipliers. This reflects the potential for future growth or the proven resilience of the industry.
For instance, companies offering cloud-based services and remote work technologies have become increasingly valuable. They are not only experiencing a surge in demand but are also considered to have substantial growth potential as the work culture globally continues to evolve. This ongoing shift has led to heightened investor interest in these types of businesses, resulting in higher valuation multipliers.
A prime location with high foot traffic or in a commercially thriving area can significantly increase the value of a business. This is because a good location often translates to better sales potential and visibility.
A business that has built a strong brand, enjoys high customer loyalty and has a good reputation in the market can command a higher multiplier. This is because a strong brand is often synonymous with reliability and quality in the minds of consumers, which is an attractive prospect for buyers.
Consistent profitability over the years signifies a well-managed, thriving business, making it more attractive to potential buyers. A track record of stable and growing profits can justify a higher multiplier, as it indicates that the business is likely to continue being profitable in the future.
Start With a Professional Business Valuation
When figuring out how much to sell your business for, there are a few ways to do it. The key is to find a price that makes sense. If your price is too low, people might wonder if something is wrong and think it’s too good to be true. On the other hand, if your price is too high, it might turn off potential buyers who think you’re asking for too much, and they might not even bother to make an offer.
A business valuation, done through a specialist business broker like Tavola Group, is a great way to understand what your business is worth and can help you improve its value over time.
Your business has grown and evolved over time. Make sure you get the most out of all that hard work by maximizing its value before you go ahead with the sale.
Get a clear picture of the value of your business with Tavola Group’s business brokers. We provide detailed business valuations, ensuring you’re equipped with an accurate understanding for setting the correct price or making purchasing choices.
Contact Tavola Group today for an accurate business valuation and truly understand how much you can sell your business for.