If you’re a business owner considering selling, this is likely a question you’ve asked yourself. Determining the correct valuation is crucial to ensuring you receive a fair price.
Setting the price too low could mean losing significant value, while pricing too high might deter serious buyers and delay the sale.
To understand business valuation, you need to familiarise yourself with some key terms.
Key Business Selling Terms
Adjusted Profits
Adjusted profits involve normalising your profit and loss statements. Since businesses often have one-off expenses that won’t recur, these must be adjusted to reflect true earnings.
You should also account for depreciation, taxes paid, and upfront payments. This process ensures that the valuation reflects the actual profit and benefits a buyer will receive.
EBITDA vs. PEBITDA
These two profit metrics help assess a business’s financial performance:
- EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortisation
- PEBITDA – Proprietor’s Earnings Before Interest, Taxes, Depreciation, and Amortisation
PEBITDA includes owner-operator benefits such as salary, perks, car, and phone. It is primarily used for small businesses. As businesses grow and generate higher profits, EBITDA becomes the standard valuation metric.
Total Investment Value
This valuation factor includes everything the business owns, such as inventory, working capital, and equipment.
Profit Multiplier
The profit multiplier determines how many times the profit is multiplied to estimate the selling price.
How to Value My Business
Business valuation is determined by different methods based on the company’s size and profitability. Buyers analyse the company’s financial performance to determine a fair purchase price.
The profit multiplier is applied to EBITDA or PEBITDA, depending on the business type. Additionally, the valuation is compared to the Fair Market Wage (FMW)—the salary an employer would need to pay someone to replace the owner.
How Much Is My Business Worth?
The valuation method depends on whether the business falls into one of three categories:
- Micro or Job-Type Business
- Profitable Business
- Substantial Business
Micro or Job-Type Business
This category includes businesses where the owner essentially “buys themselves a job,” such as online retail or craft businesses. These businesses typically earn less than or up to 1.5 times the FMW.
- Formula: If PEBITDA is less than 150% of FMW, the business value is typically 1x PEBITDA, with a variation of ±20% depending on market conditions.
Profitable Business Method
These businesses generate more than 1.5 times FMW for the owner. Valuation is based on EBITDA, rather than PEBITDA.
- Businesses in this category usually sell for 1.5x to 3.5x EBITDA.
- Example: If an owner earns $300,000 (including wages and perks), and their base wage is $100,000, the remaining $200,000 is multiplied by 3. The business is valued at $600,000.
Most businesses in this range sell for around 3 times profit.
Substantial Business
Larger businesses with significant revenue generally have a higher multiplier.
- The valuation method applies 7 times FMW as a baseline.
- The business must generate at least 7 times the owner’s salary—for example, $700,000 profit—and be under professional management or close to it.
For substantial businesses, the profit multiplier is typically 3.5x to 5x EBITDA, with 5x being rare.
- Factors influencing the multiplier include market demand and risk exposure.
- If the business involves specialised skills, a small customer base, or high operational risks, the multiplier may be on the lower end.
Final Considerations
- Fair Market Value (FMV) has generally been around 3x EBITDA for a long time. Pricing higher could make the business less attractive to buyers.
- Total investment value includes inventory, assets, and working capital. Adding inventory costs on top of valuation may overprice the business, making it difficult to sell.
- A valuation should factor in whether the asset value of the business exceeds projected future earnings. In that case, the price should be based on resale or recreation value, not an owner’s internal estimation.
Conclusion
If you’re wondering how much you can sell your business for, these proven valuation methods provide a solid starting point. Understanding profit multipliers, EBITDA, PEBITDA, and total investment value will help you determine a fair and realistic price.
For best results, consult with a business broker to ensure you maximise your business’s value while staying competitive in the market.