Free Business Rules Of Thumb For Small Business

Free rules of thumb can be used to determine the asking price of a business being sold. Every industry has a multiple that is multiplied by earnings or seller discretionary earnings (SDE) to suggest an estimated selling price for a company. The average cash flow multiple is 2.41 to 3.43 times SDE for most small companies, according to the most recent Bizbuysell Insight Report.

 

Specific industries use rules of thumb to suggest a multiple based on data from businesses sold. Companies that have unreliable earnings get lower multiples. Businesses that are easy to run with reliable earnings get the highest multiples. Additionally, larger businesses with more systems will command a higher multiple.

 

Three Major Ways To Determine The Value of  A Business

 

Income Approach

This method relies on how much income or seller discretionary earnings (SDE) the business brings in annually. 

Asset Approach

This method adds up furniture, fixtures, and equipment (FFE). This is essentially looking at the replacement value of the business. Goodwill is included as an intangible asset and does get consideration.

Comparable Sales

This analysis is data-driven. It compares the sales price of businesses in the same or closely related industry of similar size. This method is much like comparable sales data used for real estate.; however, businesses are more complex, while real estate tends to be treated more like a commodity.

 

 

Pricing Models

There are several business pricing models not included here. Often, many valuation methods are used together. They may be weighted and averaged depending on the industry and the company’s circumstances.  Click here for a free online preliminary appraisal to determine what your business would sell for in today’s market. No obligation or cost and it may be the most valuable information to make key decisions about your company.