Business For Sale & Franchise Search Engine  
My Account
Search Businesses For Sale


to refine your search results use advanced search  
Franchise Opportunities

Sell Your Business, Starting at $20.99 per month
Small Business Resources > What Is My Business Worth? Learn How Small Businesses Are Priced

What Is My Business Worth? Learn How Small Businesses Are Priced

The first important concept that relates to business pricing is the concept that cash is king. Buyers acquire businesses for the income that they generate. Regardless of how glamorous a business is, at the end of the day buyers commit based on cash flow. Buyers move forward when the return on their investment makes financial sense.

So how does one arrive at a price when selling a business?

First some clarifications: EBITDA, earnings before interest, taxes, depreciation, and amortization is a common measure that publicly traded companies use to express earnings. Publicly traded companies want to show the highest earnings possible to please shareholders and wall street. This is quite different than privately owned companies. Business owners usually run as many expenses through their business as possible to reduce tax exposure. Also, EBITDA is not a good measure for privately owned companies since it does not include the owner's salary and any perks for the owner.

So how do we show true earnings for a private company? Seller's Discretionary Earnings, defined as: a measure of the total financial benefit accruing to the owner of a business. This is also called: cash flow, free cash flow, net cash flow, discretionary income, owner's benefit, net income, etc. - these terms, used in the context of business sales, all refer to the same value. The value, that we are seeking, is he amount that will flow to the new owner once the transaction is completed. Once the change in ownership is completed, the new owner will be able to determine where these funds are expended. I use the term sellers discretionary earnings or SDE.


SDE is comprised of: pre-tax earnings, depreciation, amortization, interest - PLUS owner' s salary, owners perks, and non-recurring expenses. Let's take a closer look at the latter elements.

Owner's salary: salary at fair market value for one owner.

Owner's perks: cars, boats, homes, vacations, parties, gifts, life insurance, club memberships, tickets, salary to a non-working spouse or any item that the owner has personal discretion over.

Non-recurring expenses: one time expenditures that are not expected to happen again.


How is SDE calculated? This is done by recasting financial statements. This is why good financial records are essential. Recasting is a process where the items listed above are "added back" to the bottom line. This is done by a professional business broker or a business valuation analyst. Once completed a buyer will have a more complete picture of the total benefit the business will provide for them. Ideally, the three most recent years of financial statements are recast. The three SDE numbers are then averaged using a weighted average, the most recent being the most important and a SDE figure is arrived at.

Recasting is also done so that buyer can compare apple to apples when they are looking for a business to buy. If you look at business for sale websites, virtually all of the listings feature a cash flow figure. This figure refers to SDE.

An important side note: When recasting, it is important to be realistic in the calculations. IE: The company retreat could be considered discretionary. However, if this retreat has been happening for the last twenty years, and the employees view this free trip as a form of compensation, then it may be highly detrimental to add this back since the new owner will probably need to continue this event in the short term.

SDE Multiples and the Setting an Asking Price

Once the SDE number is determined we can then move on to identifying a proper asking price. Most small and medium sized businesses will sell for a multiple of this SDE number. The multiple for small and medium sized businesses ranges from 1-7 times SDE. Market data is often used to ascertain the appropriate multiple for a business.

For my clients, I will use our database to pull market data from across Southern California and if needed from across the US to see what multiples similar businesses are commanding.

SDE X Market data driven multiple = Asking Price. The asking price is then driven up or down based on additional factors such as intangible assets and risk.

About the Author
Ron Van Orden is a Business Broker practicing in Southern California and the creator and writer of an online resource dedicated to the buying and selling of small businesses. A Southern California native, Ron works with successful businesses throughout Los Angeles, Orange County, Riverside, San Bernardino and Ventura Counties.

Related Resources
Selling a Business
12 Laws of the Business Buying and Selling Jungle - PART I
12 Laws of the Business Buying and Selling Jungle - PART II
3 Reasons To Sell Your Business Now For Maximum Profit
8 Key Steps to Selling Your Business
A Simple Formula For Increasing The Value Of Your Business
Are Business Brokers Licensed?
Auto Franchises
Build Business Value – Before Selling A Business
Business Brokers
Business Lawyer
Businesses for Sale by Owner
C-Corp Asset vs Stock Sale Dilemma
Capital Gains Deferral in a Business Sale
Closing The Deal
Coffee Franchises
Due Diligence - Not As Scary As It Sounds
Financing The Deal
Food Franchises
Franchise Information
Franchise Reviews
Free Small Business Magazines
Great Reasons to Sell Your Business and How to Do It Right
House Cleaning Franchises
How Much is My Business Worth?
How Not to Sell Your Business
How to Sell a Business Online
How to Sell a Small Business
How to Sell Your Business
How To Value A Business
Hurricanes Affect the Value of Florida Businesses
Important Tips When Selling a Business
Preparing a Business for Sale
Protect The Merger Or Sale Value Of Your Business: What You Can Learn From The DaimlerChrysler Deba
Role of Business Brokers in Selling a Business
Run Your Business Like You Have To Sell It
Sell a Business
Sell a Franchise
Sell My Family Business - Deciding to Sell the Family Business
Selling A Business - The Eleventh Hour Contract Change
Selling a Retail Business – How to Sell a Retail Business
Selling a Troubled Business
Selling Your Business - A Tool To Reduce Capital Gains Taxes
Selling Your Business - Prepare for the Buyer Visit
Selling Your Business - Should It Be a Do It Yourself Job?
Selling Your Business - Ten Steps to Increase Selling Price
Selling Your Business - Tips to Selling Your Business
Selling Your Business - What Would Sam Zell Do?
Selling Your Business - Why Use a Business Broker
Selling Your Technology Company - Why Earn Outs Make Sense Today
Should I Use a Business Broker to Sell My Business?
Should I Use a Business Broker to Sell My Business?
Small Business Debt Relief
Tax Tips on a C Corp Asset Sale
The Many Different Deal Structures When Selling a Business
The Pricing Dynamics of Selling a Business
The Ten Commandments of Selling My Business
To Sell a Business or Not Sell a Business A Crossroads Decision
What is a Business Broker?
What is a Covenant Not to Compete?
What is a Letter of Intent?
What is an E-2 Visa?
What is Cash Flow?
What is Due Diligence?
What is EBITDA?
What is FF&E? - Furniture Fixtures and Equipment
What Is My Business Worth? Learn How Small Businesses Are Priced
What is Seller's Discretionary Cash Flow?
When is the Right Time to Sell My Business?

©2024 MH Sub I, LLC dba Internet Brands
Broker Membership | Terms Of Use | Financial Disclaimer | Privacy Policy | Cookie Policy | Resources | Franchise Opportunities | Website Traffic Ranking | Sitemap | Careers | Contact Us | Manage Preferences Your Privacy Choices