How Much Should I sell my business for?
Deciding to sell your business is a big step. We’ve had clients choose to sell their business for many reasons. Some of them wanted to retire, others wanted to start a new business, and some just wanted to simply cash out. Whatever your reason is, it is important to know how to value your business before you list it for sale.
There are a lot of factors on how to value a business when your ready to sell, but for simplicity’s sake, we will go over the three most important factors for most businesses. Please note, not all business are the same and many other factors can make a huge difference.
Typically, the first step in the process is determining the business’s net profits. In most cases this can be simply achieved by looking at a profit & loss statement or a tax return.
Once you determine the net profit, you need to determine your discretionary add-backs. Discretionary add-backs are items like donations, child care, or other expenses that would not be present if you didn’t own the business. For example, if you donated $20,000 a year and it shows as an expenses on your P&L, a new owner could decide not to donate, so those “expenses” would disappear and can be considered profit.
After figuring out the total “discretionary” net profits, the third step is to figure out the multiplier. Most businesses which are valued under $5M have a multiplier of 2-3. This step is extremely important to get correct. If you use too low of a multiplier for you business, you will under value your company and sell for less. If you use too high of a multiplier, you probably will have a hard time selling your company.
At the end of the day, you can come up with a rough business valuation using : (Net Profits + Discretionary Add-Backs) * The Industry Multiplier or by using our business valuation calculator.
If you have any questions about what your business is worth, please do not hesitate to call us! We are a Texas based Business Brokerage Firm with offices in Austin, Dallas, Houston, and San Antonio that specializes in selling businesses. – Wishing you the best, Alex Khabbaz, Austin Business Broker at Texas Business Brokers.