How to value a Business
Advice or guidelines for business owners
How to Value a Business Using Multiples of Earnings
Teaching business owners how to value a business is one of the primary goals of this website.
For middle-market businesses (with business values in excess of $5,000,000), we provide a lot of information in regards to how to value a business using EBITDA (Earnings Before Interest Taxes Depreciation and Amortization). For main street businesses (business valued below $5,000,000), we provide the most comprehensive information on the Internet about How Small Businesses Are Valued Based on Seller’s Discretionary Earnings (SDE).
To learn how to value a business, you must first understand how to calculate “earnings” as defined by EBITDA, Adjusted EBITDA or Seller’s Discretionary Earnings (SDE). The business value is then derived by applying the appropriate multiple to the “earnings” number. But be careful! The appropriate multiple of earnings depends on the definition of “earnings” being used. Read this article to learn how SDE vs. EBITDA vs. Adjusted EBITDA Leads to Multiples Confusion.
How to Value a Business in Excess of $5,000,000 Using EBITDA Multiple
- The value of a business is usually based on EBITDA multiples for larger businesses.
- In some instances, the business value is dependent on EBITDA multiples by industry.
- EBITDA stands for Earnings Before Interest Taxes Depreciation and Amortization.
- EBITDA calculations are therefore Earnings + Interest + Taxes + Depreciation + Amortization.
- Adjusted EBITDA also adds back an owner’s entire salary then imputes replacement wages for a person hired to run the company. Adjusted EBITDA is used to value a business when its owner is paid more than fair market value.
For a business that values less than $5,000,000, you need to understand how to value a business using earnings multiples of SDE:
How to Value a Business less than $5,000,000 Using SDE Multiples
- Small business valuation is usually calculated on multiples of earnings based on Seller’s Discretionary Earnings (SDE).
- In calculating SDE, the value of all owner’s compensation, including perks, is added to EBITDA.
- Therefore, Seller’s Discretionary Earnings (SDE) equals EBITDA + owners compensation + other owner benefits.
- Because SDE results in a higher base number than EBITDA, the EBITDA earnings multiple is a higher number than the SDE earnings multiple.
- Similar to large business valuations, the business value may be dependent on EBITDA multiples by industry. However, when viewing the EBITDA multiples chart, keep in mind that by definition SDE multiples are less than SDE multiples.
- We have a very specific example of calculating EBITDA, Adjusted EBITDA and SDE in this newsletter: An Example of SDE vs. EBITDA vs. Adjusted EBITDA.
Other Resources for Information About How to Value a Business
In addition to the above six articles, here’s a list of other articles addressing specific aspects of business valuation:
EBITDA Multiples by Industry
EBITDA Multiples by Industry Determining the multiple of EBITDA (by industry) to use for company valuation can be tough. A
EBITDA Examples
EBITDA Examples Perhaps the best way to understand EBITDA is to view an EBITDA example. EBITDA is “Earnings Before Interest,
Adjusted EBITDA Calculation
Adjusted EBITDA Calculation EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is a measure of earnings used to estimate the
Add Backs for Business Valuation
Add Backs for Business Valuation Small businesses are valued as a multiple of seller’s discretionary earnings. The purpose of add
Earnings Multiples for Small Business
Earnings Multiples for Small Business Depending on their size, businesses are valued based on a multiple of earnings. But which
How to Valuate a Company
How to Valuate a Company There are many methods to valuate a company. If you are a small business owner
How to Value a Small Business for Sale
How to Value a Small Business for Sale If you are considering selling your company, there’s nothing more important than
What Is My Company Worth?
What Is My Company Worth? As a business owner, you should always be asking “What Is My Company Worth?” The
How Much Is a Business Worth?
How Much is a Business Worth The short and quick answer to the question “How Much is a Business Worth?”
How Do I Value a Business?
How Do I Value a Business Are you asking “How Do I Value My Business?” because you are considering selling
How to Value Goodwill When Selling a Business
How to Value Goodwill When Selling a Business When a business is sold for more than the fair market value
