One of the first questions we hear from business owners considering a sale is, “What is my business worth?” It’s a fair question, but it’s also one of the most misunderstood parts of selling a business.
For most businesses, valuation starts with earnings. Buyers aren’t just purchasing assets. They’re purchasing the ability to generate income. That’s why cash flow is often the biggest driver of value. Depending on the size and structure of the business, valuation is typically based on Seller’s Discretionary Earnings (SDE) or EBITDA.
From there, buyers and brokers apply a multiple. This is where things can get confusing. Owners may hear that businesses sell for “three times earnings” or “five times earnings,” but the multiple depends heavily on the business itself. Two companies with the same profit can sell for very different prices if one is stable and transferable, and the other is risky.
Here are some of the key factors that can raise, or lower, value:
Consistent Cash Flow - A business that makes steady profit year after year is usually worth more than one that has unpredictable ups and downs. Buyers want reliability.
Being Easily Transferable - Buyers will pay more for a business that feels easier to take over. Some things that can increase value include having a strong team in place, loyal customers, clean, organized financial records, not relying entirely on the owner, and having room for growth.
Over-Dependence - On the other hand, value can drop if the business depends heavily on one customer, one employee, or the owner doing everything.
The bottom line is that business valuation doesn’t need to feel overwhelming. In simple terms, buyers want a business that:
- Makes money
- Can keep making money
- Is easy to transition
If you’re thinking about selling, understanding your business’s value is one of the smartest first steps you can take. At Calhoun Companies, we help business owners understand what their business may be worth and what they can do to strengthen value before going to market. If you’re curious about your options, we’re always happy to have a confidential conversation.