If you are thinking about selling your business, you need to know what a reasonable price for it would be.
Most SME owners want to know how much their business is worth. If you want to buy a business, you need to know how much is reasonable to pay. Here’s a quick guide.
(Maintainable EBITDA x Multiple) +/- Net Assets = Valuation
EBITDA stands for Earnings Before Interest, Tax, Depreciation and Amortisation. It is the income (also called sales or turnover) of your business minus the costs, but before taking away any interest payments, tax payments, depreciation or amortisation charges.
The value of a small business is worked out by calculating the maintainable EBITDA, multiplying that figure by a multiple and then adding/subtracting the net assets of the business.
“Maintainable” refers to what EBITDA is likely to be in the years ahead, ignoring any temporary developments this year and taking into account factors such as the industry or sector that you work in or the opening of a competitor in the area.
The multiple could range anywhere from between one to 15. It will depend on your industry. A pharmacy would be worth up to six times EBITDA. A nursing home may be worth up to eight times its EBITDA. A smaller hotel could fetch a multiple of up to ten times its EBITDA.
When buyers are deciding on a multiple to use there are many factors they consider:
- Type/sector of the business
- Turnover level
- Sales mix
- Gross margin = (sales – cost of sales)/sales
- Wage costs
- Rent and other overheads
- Future growth potential
- Lease terms (if applicable)
- Future profits and cash generation from the business
- Competition, including potential new openings
There is no magic formula for calculating the earnings multiple but all of the above factors should be considered in assessing the valuation of your business.
Jason Bradshaw works in corporate finance. He specialises in advice on the sale and valuation of companies, acquisition of businesses and general business advice.