If you are thinking a Selling a Business or Buying a Business, You need to know what it's worth.
Here are 5 methods of valuing a small business. They are presented in their most simple forms.
A common method of valuing a small business is to use what is known as 'valuation multiples.'
Valuation multiples for a small business are simply a way of comparing your business to other businesses in your industry that have been sold recently.
The following are some common valuation multiples for small businesses:
Retail: 0.5 – 1.5 times EBITDA
Restaurants: 0.5 – 2.0 times EBITDA
Manufacturing: 0.5 – 3.0 times EBITDA
Service businesses: 1.0 – 4.0 times EBITDA
Software-as-a-service: 4.0 – 8.0 times EBITDA
If you’re thinking of selling your small business in Vancouver or BC, you’re probably wondering how to value it.
If you are buying a business in BC or Vancouver, you want to confirm that the sellers price is accurate.
By looking at the sale price of similar businesses, you can get a rough idea of what your business might be worth.
Types of Valuation Multiples
There are several different types of valuation multiples that can be used to value your small business.
The most common methods are:
Earnings Multiples
This type of valuation multiple calculates your business’s earnings before interest, taxes, depreciation, and amortization. This formula is referred to as 'EBITDA'.
For example, if your businesses EBITDA calculation is $2 million and similar businesses in your industry are selling for an average of six times EBITDA, then your business could be valued at $12 million.
This type of valuation is best for a small business that is profitable and has a history of consistent earnings.
If your small business is new or has been struggling to make a profit, this type of valuation may not be as accurate and other valuation methods should be used.
Sales Multiples
Another common type of valuation multiple is the sales multiple.
This one simply looks at your business’s total sales as the basis for determining the value of your business.
For example, if your business did $1 million in sales last year and similar businesses in your industry are selling for two times (2X) sales, then your business could be valued at $2 million.
This type of valuation is often used if your business is in the early stages or if your business is not profitable yet.
Asset Multiples
Asset multiples are sometimes used to value businesses that have considerable physical assets, like equipment or real estate.
To calculate this type of valuation multiple, simply take the total value of all your assets and divide it by the sale price of the business.
For example, if your assets are worth $3 million and you’re selling the business for $5 million, then your asset multiple would be 0.6.
Asset based valuations are often used for businesses that are not earning a profit, but have meaningful asset value.
Sellers Discretionary Earnings
This valuation multiple calculates the discretionary earnings of the business owner.
Sellers Discretionary Earnings are a combination of wages, bonuses, dividends, car allowance/expense, insurance and other owner perks that have a cash value.
A Sellers Discretionary Earnings can vary from industry to industry.
This type of business valuation method is often used for small businesses or owner/operator businesses where a large portion of wages and profits funnel to the business owner in one form or another.
Summary
There are many ways that a small business can be valued and the information above is presented as a simplified introduction into the world of business valuation.
If you are thinking of selling your business in Vancouver or BC, contact Stonebridge Business Brokers of BC to get more information on what your business is worth.
There are many factors that affect the value of a business like geographic location, the regional economic outlook where the business is located, tax laws, municipal regulations and of course the financial position of the business.
An accurate business valuation is of paramount importance and it is best left to an experienced professional business valuation company like Stonebridge Business Brokers of BC.
If you need help with determining your company’s worth, schedule a free consultation with Christopher Hall. He can help you determine the best way to value your company and maximize its value.
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