Start With Earnings, Not Sales
Two companies with the same sales can sell for very different prices. A shop doing $7 million a year on thin margins may be worth less than one doing $3 million with strong profit. Buyers pay for what is left over.
Seller's discretionary earnings
For most companies selling under about $2 million, the measure is seller's discretionary earnings, or SDE. It is the total benefit to one working owner: net profit plus your salary, health insurance, personal perks and one time expenses.
EBITDA
Once a company is large enough to pay a manager a market wage and the owner has stepped back, buyers switch to EBITDA. It shows the profit after everyone, including a paid manager in your role, has been paid fairly.
Recasting the Books
Recasting means adjusting your profit and loss statement so it shows normal, repeatable cash flow. It is one of the most misunderstood parts of a valuation, and one of the most important.
- Add back your own pay, family members paid above market and personal costs run through the company.
- Add back true one time costs, like a lawsuit or a move.
- Remove income that won't repeat, like proceeds from selling equipment or a loan.
- Owner draws are not automatically cash flow; they need to be sorted out properly.
Cash that never made it onto a tax return does not count. A buyer only pays for what can be proven, so unreported income costs you far more at sale time than it saved in taxes.
The Multiple
The earnings figure is multiplied by a number that reflects risk. Many Main Street companies sell for roughly two to three times cash flow. Larger, steadier companies with management in place earn higher multiples.
Multiples stay fairly stable over the years. Waiting a year rarely improves yours much. Improving the company usually does.
What Pulls the Number Down
Customer concentration is the most common problem. If your top one to three customers bring in more than about 15 to 20 percent of revenue, buyers often discount the price or walk away.
Dependence on the owner is the second. If customers call you and only you, a buyer has to wonder what happens when you leave. A below market lease on a building you own is another, since buyers figure rent at market rates.
What Pushes It Up
Buyers pay more for companies with depth in their people, steady and documented profit, and repeatable processes. A good test is whether you can take two weeks off and come back to a company that ran fine.
Recurring revenue, like service contracts, helps too. So does a long operating history and a good reputation online. See how this plays out in specific fields on our industry pages.
Taxes Change What You Keep
Price is only half the story. How the deal is structured decides how much is taxed and at what rate. In Oklahoma, the capital gain deduction can matter a great deal for long held companies.
Your CPA should look at the structure before you agree to terms. To learn what happens after you ask, read what happens next, or go straight to the free valuation form or call (405) 555-0158.