Two Numbers Make the Price
A buyer boils every company down to two things. How much money does it reliably make each year? And how many years of that money are they willing to pay for up front?
The first number is your earnings, measured the right way. The second is the multiple. Price is one times the other, then adjusted for terms and risk.
Which Earnings Figure Applies to You
Seller's discretionary earnings
Most companies that sell for under about $2 million are priced on SDE. It answers a plain question: if one owner ran this company, how much would that person take home in total?
SDE starts with net profit, then adds back your salary, your payroll taxes, the health insurance the company pays for you, and other personal or one time costs that run through the books.
EBITDA
Once a company is large enough that a hired manager runs it, buyers switch to EBITDA. That is earnings before interest, taxes, depreciation and amortization, after paying a fair salary to whoever runs the place.
If you still do the work of a general manager, expect the buyer to deduct the cost of replacing you.
Recasting, Line by Line
Buyers rebuild your profit and loss statement before they believe it. This is called recasting, and it is where most of the disagreement in a sale happens. Common adjustments include:
- Your own pay and benefits, added back
- A relative on payroll who doesn't work there full time, added back
- A one time legal bill or a storm repair, added back
- Money from selling a truck or a bank loan, taken out, because it isn't operating income
- Rent below market on a building you own, adjusted up to market
Every add back needs proof. A buyer and their lender will compare your tax returns to your bank deposits. Cash that never made it onto a return doesn't count toward value.
Skipping tax on cash can feel like a saving. At a sale, every dollar you left off the books can cost you two or three dollars of price.
Where the Multiple Comes From
Most established companies in the Main Street and lower middle market range trade at roughly two to three times cash flow. Multiples don't jump around much from year to year, so waiting rarely buys a better one.
What changes the multiple is risk. A buyer pays more when the earnings look likely to continue under a new owner. They pay less, or walk, when something could break.
What Pulls the Price Down
- Customer concentration. If your top one to three customers make up more than about 15 to 20% of sales, buyers often cut the price by about that share.
- Owner dependence. If customers only call you and staff only ask you, the buyer is paying for your relationships, and those don't transfer.
- A slide in results. Falling sales during a sale scare buyers. So does a sudden jump right before listing.
- Messy books. If returns and statements don't match, buyers assume the worst number.
Real Estate Is Its Own Question
If your company owns its building, the property is valued differently from the business. Many buyers of the company won't want to buy the building too.
You might sell both, sell the business and stay on as landlord, or sell the property separately. A broker can talk through which fits your numbers.
Turning This Into Your Number
A broker can usually give you a working range after one conversation and a look at a few years of returns. Read how selling works to see what comes after, and the seller filings guides for the Missouri side of a closing.
If a buyer will need a loan, read seller financing when you sell a business as well. Then send the form or call (816) 555-0167.