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UBB - Business Evaluations

The value of the small business is mostly determined by the cash flow (or business brokers use the term "Seller's Discretionary Earnings" instead to be more accurate). Seller's Discretionary Earnings (SDE) is defined as net income before taxes (operating income); interest; depreciation and amortization; owners compensation; owners benefits; and non recurring expenses.

Most small businesses sell for 1.5 - 3.5 (multiples) times the yearly SDE, depending upon the value factors of the business. Things that determine the multiple or value factors are the stability of historical earnings; business & industry growth; type of business (service with few assets to manufacturing with significant assets); location & facilities; stability & skill of employees; competition; diversification of products, service & geographical markets; desirability of the business; depth of management; and terms of the sale. The national average is 2.76 times SDE.

The inventory, equipment or fixtures are included in the price because they are what is required to generate the SDE. Some businesses need inventory, some need equipment (assets) and some need both, depending on the type of business. The amount of assets is one of the criteria that helps determine the value a business.

Some value (but not too many small business brokers) the business by its EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization. The multiple that is used is generally in the area of 4 to 6 times EBITDA. EBITDA is mostly used by investment bankers or M&A folks, people who usually handle bigger stuff ($ 20 million+ price tag).

Business brokers count owner's compensation and owner's benefits as part of earnings or SDE (Seller's Discretionary Earnings). You can also define SDE as EBITDA plus owner's salary plus owner's benefits. Basically, if you take SDE times 1.5 to 3.5 multiple, you should have similar numbers if you calculate EBITDA times 4 to 6 times.

The reason business brokers don't usually go by EBITDA times 4 to 6 times is that, it's basically the owner's discretion to pay him/herself salary of whatever the amount and most owners write off a lot of personal expenses through the business (called owner's benefits).

Below is a list of documents that a typical business broker needs in order to package a business for sale;

1) last three years of financial statements including Balance Sheet and income (P&L) Statement

2) last three years of tax returns

3) copy of the lease

4) major fixture, furniture & equipment list with CURRENT FAIR USED MARKET VALUE

United Business Brokers provides a business valuation calculator free of charge. You must log on to use this free service.