But many other factors come into play. For example, a buyer can pay three or four times the profits if a company has market leadership and strong management. However, these general rules can vary considerably. Business value is calculated as three to five times EBITDA (earnings before interest, income taxes, depreciation and amortization), another as five to six times profits, and another as once or twice sales.
How do you know which one to use for your particular business? If you can achieve this, you can also increase the business multiple, which increases the valuation. Finally, even if two companies in the same industry report the same revenues and profits, other factors could make one worth much more than the other. Your SDE represents the true monetary value of your company, but your SDE values your business according to industry standards. The company's cash flow forecast is adjusted (or discounted) according to the risk involved in purchasing the company.
You usually need to enter nothing more than a few numbers, such as sales and profits for the last 12 months, plus the owner's salary, to get an estimate of business value. This method assigns a value to a company by estimating potential future earnings (FME), capitalized at an appropriate rate that reflects business prospects, business risk, investor expectations, future growth prospects and other factors specific to the entity. In addition, it is essential to demonstrate to potential buyers how your business will continue to grow and generate profits. If you're a small business owner, you've probably wondered at some point: “I wonder how much my business is worth.
Before buyers can confidently bid on a company, they must be knowledgeable (if not expert) in that company's industry. If two companies have the same income, but one is profitable and the other is not, they are unlikely to have the same value. But when the discounted cash flow method represents more fluctuations in a company's financial future, the capitalization method assumes that calculations for a single period of time will continue into the future. That future profitability range is calculated by assigning a revenue multiple to the company's current revenues.
Liabilities include any outstanding debt or credit on your company's books and detract from the total value of a company. Buyers can have their own established business and only be interested in the revenue that a new customer list can generate, and not in the rest of the seller's business; this may include employees, premises, office furniture, equipment and other miscellaneous assets. The higher the multiple, the lower the risk that the company will continue to obtain the multiplied level of profit.