Retirement Blog

Finance Blogs » Retirement Blog » How much is your business worth?

How much is your business worth?

By Jennie L. Phipps ·
Wednesday, May 14, 2014
Posted: 1 pm ET

About 65 percent of new sellers of small businesses in the first quarter of 2014 were baby boomers, most of them hoping to finance their retirement. At the same time, 41 percent of their buyers were also baby boomers seeking a moneymaking opportunity, according to a study by a consortium of business brokers and university researchers.

"Older boomers are selling and the younger boomers are buying," says Scott Bushkie, principal of Cornerstone Business Services, who worked with the International Business Brokers Association, M&A Source and Pepperdine University's Graziadio School of Business and Management to complete this research.

Bushkie says while it's a buyer's market and will be as long as there are so many older boomers hoping to sell, sales of small businesses that appear to be strong opportunities are brisk. Among the factors driving sales are buyers with cash available, banks that are increasingly willing to make business loans and greater confidence in the overall business climate.

What's the bottom line?

If you own a small business and selling it is part of your retirement planning, the bottom line is, how much are you likely to get from the sale? Or if you are buying one, what can you expect to pay?

Bushkie explains that small businesses are frequently valued differently than large ones. While large businesses are priced based on multiples of EBITDA, or earnings before interest, taxes, depreciation and amortization, businesses that earn less than $500,000 are valued using SDE -- seller's discretionary earnings. That number is calculated using EBITDA plus the primary seller's salary and benefits.

The chart below spells out the current trends in multiples, but Bushkie says sellers -- and buyers -- should prepare to be flexible. "It all depends on the business," he says.

Comparison of how much businesses sold for

Q1 2014 Q4 2013 Q1 2013
<$500K 2 (SDE)* 2 (SDE) 2 (SDE)
$500K-$1M 2.6 (SDE) 2.5 (SDE) 2.6 (SDE)
$1M-$2M 3.1 (SDE) 3 (SDE) 3.5 (SDE)
$2M-$5M 4.3 (EBITDA)** 4 (EBITDA) 5.75 (EBITDA)
$5M-$50M 4.5 (EBITDA) 4.5 (EBITDA) 5.5 (EBITDA)

*SDE stands for seller's discretionary earnings, which is EBITDA plus the seller's salary and benefits.

**EBITDA is earnings before interest, taxes, depreciation and amortization.

Sources: International Business Brokers Association, M&A Source and Pepperdine Private Capital Markets Project at Pepperdine University's Graziadio School of Business and Management

The biggest mistake sellers make is overpricing a business they have grown from scratch, Bushkie says. "It's like the business is their child. They think theirs is the smartest and the best looking and they don't want to hear otherwise."

But overpricing can drive away potential buyers, and waiting too long for the buyer willing to pay a premium can be a big mistake if business cycles change or the seller encounters a problem that makes him eager to unload his enterprise, Bushkie says.

Sellers of businesses worth less than $500,000 can expect to close in four months, but sellers of larger businesses can plan on the deal taking nearly a year.

Bushkie thinks sales of businesses will remain brisk as boomers' circumstances change, but he doesn't expect prices to go up because there are too many businesses on the market. His best advice to people on either side of the transaction is to get knowledgeable help setting a price and structuring the deal. "You don't want to underprice it or overprice it," he says.

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.