How Much Can I Sell My Business For?

This is probably a question you have asked yourself if you are a business owner considering selling. There are several different ways to calculate a business valuation, and it is very important to get the valuation right.

Value it too low, and you could lose a lot of money. Go too high and you will miss out on the serious buyers and risk not getting a sale.

Before getting into our calculations, there are a couple of terms you need to know.

How Much Can I Sell My Business For?

Key Business Selling Terms

The first is ADJUSTED PROFITS.

This means normalising your Profit and Loss. For example, every year you have one-off expenses that won’t repeat themselves, so you must normalise the numbers before using them as a basis for future earnings.

You must also adjust for depreciation, any taxes paid and any upfront payments. In other words, you need to get to the real profits and real benefit to the buyer.

The next two terms you need to understand are EBITDA and PEBITDA.

These are 2 different types of profits:

EBITDA (Earnings Before InterestTaxesDepreciation, and Amortization)

PEBITDA (Proprietors Earnings Before InterestTaxesDepreciation, and Amortization)

PEBITDA includes all owner-operator benefits including wage, perks, car, phone.

This is used for smaller businesses and as they grow and get more profitable, we use EBITDA.

The next term you need to know is TOTAL INVESTMENT VALUE.

This includes all inventory, all working capital and equipment, so everything is valued as one.

And finally, PROFIT MULTIPLIER. That means how many times we multiple the profit to calculate the sale price.

How To Value My Business

Now we can look at the 3 main methods used in a business valuation. This is how buyers assess the business based on current operation and profitability and what they think they should pay.

We can use the Profit Multiplier – depending on whether it’s EBITDA or PEBITDA – and we also look at profit compared to FMW – Fair Market Wage – and that depends on the size of the business we are valuing.

How Much Is My Business Worth?

The method of valuation used depends on whether the business is a Micro or Job Type Business, a Profitable Business, or a Substantial Business.

Micro or Job Type Business

This refers to situations where you buy yourself a job, or you sell things online or cottage craft industries. These businesses are not valued in the same way.

These are businesses that make less than an owner-operator would make doing a job, or up to 1.5 times the FMW (Fair Market Wage).

What is the FMW? That is what you would need to pay someone to do what you do.

Here is the formula for valuing this business: If the PEBITDA is less than 150% of the FMW, you will multiple this by 1 PEBITDA and that’s the value. You can go up or down 20% but in the most part, this is what a buyer would expect to pay.

Profitable Business Method

These are businesses that generate more than 1.5 times FMW for the owner-operator. For these valuations, we use EBITDA.

Any business that generates more than just a wage for an owner will sell for between 1.5x and 3.5x EBITDA. That means you take the owner’s wage out of it and whatever is left is multiplied by 1.5 to 3.5 times.

For example, an owner-operator gets $300,000 out of the business – that’s a $100,000 wage plus perks, car, phone etc. So, we take out the $100,000 wage and multiple the $200,000 profit by 3, making it a $600,000 business.

Most business sales in this category are based on 3 times the profit.

Substantial Business

The multiple for substantial businesses is around 7 times FMW at the moment.

This means the business needs to make at least 7 times the owner’s wage – ie $700,000 profit – and needs to be under management or very close to management with high barriers to entry.

There can be no big risks in the business, such as high qualifications or skills needed by the owner, or exposure to small number of clients, key person risk etc.

In this scenario, the multiplier goes somewhere between 3.5 to 5 times. It is very rare to go above 5.

In 90% of cases, this method is very accurate.

The multiplier is chosen based on how active the market is – ie demand – and whether there are any large risks. Unless there is a substantial risk, its very safe to start marketing the business at a rate of 3 times.

The Fair Market Value – FMV – has been 3 times for a long time. If you go above that, you may start pricing yourself out of the market.

Now, remember all these businesses are total investment – ie that includes working capital, assets, and inventory.

If a business has a very large inventory and you put this on top of the valuation, it will take the asking price higher and the business probably won’t sell. So, calculate the value at 3 or 3.5 times and then deduct the value of the stock.

You could try 3 times plus the inventory and the market will show you whether that’s correct.

The one exception to the valuation rule is when the asset value of a business is worth more than future earnings. Make sure this is not the owner’s calculation or insurance value, but resale value or recreation value – ie what would it take from zero to build the business to this asset value.

So, next time you ask yourself or a business broker, how much can I sell my business for, you can used these tried and tested methods to calculate the business valuation.