Small Business Valuation Multiples Simplified (2024)

Small Business Valuation Multiples Simplified

October 11, 2022

by Andrew Rogerson

in Business valuations

One common method of valuing a small business is to use valuation multiples.

Valuation multiples for a small business are simply a way of comparing your business to other businesses in your industry that have been sold recently.

The following are some common valuation multiples for small businesses:

Retail: 0.5 – 1.5 times EBITDA
Restaurants: 0.5 – 2.0 times EBITDA
Manufacturing: 0.5 – 3.0 times EBITDA
Service businesses: 1.0 – 4.0 times EBITDA
Software-as-a-service: 4.0 – 8.0 times EBITDA

Source: Pepperdine Private Capital Markets Report

If you’re thinking of selling your small business in California, you’re probably wondering how to value it.

Most importantly, you want to get a good price for all your hard work in building up your business from scratch.

Types of Valuation Multiples

There are several different types of valuation multiples that you can use to value your small business.

The most common are:

Earnings Multiples

This type of valuation multiple looks at your business’s earnings before interest, taxes, depreciation, and amortization (EBITDA) and compares it to the sale price of the business.

For example, if your EBITDA is $1 million and similar businesses in your industry are selling for an average of six times EBITDA, then your business could be valued at $6 million.

This type of valuation is best for a small business that is profitable and has a history of consistent earnings.

If your small business is new or has been struggling to make a profit, this type of valuation may not be as accurate.

Sales Multiples

Another common type of valuation multiple is the sales multiple.

This one simply looks at your business’s total sales and compares it to the sale price of the business.

Asset Multiples

Asset multiples are sometimes used to value businesses that have a lot of physical assets, such as equipment or real estate. If you are a distribution company, this is a good valuation to get started on.

To calculate this type of valuation multiple, simply take the total value of all your assets and divide it by the sale price of the business.

For example, if your assets are worth $3 million and you’re selling the business for $5 million, then your asset multiple would be 0.6.

Price-Earnings Ratio

The price-earnings ratio (P/E ratio) is a valuation multiple that’s often used to value publicly traded companies but you can also use it to value privately held companies.

To calculate this multiple, simply take the current stock price of a publicly traded company and divide it by its earnings per share (EPS). EPS can be found on a company’s income statement.

For example, if Company XYZ trades at $100 per share and its EPS is $2, then its P/E ratio would be 50 ($100/$2).

Final Take

Small business valuation multiples are used to guide an accurate appraisal of your company.

While they’re not an exact science, they can give you a ballpark estimate of what your business might be worth.

Keep in mind that other factors can affect the value of your business. This includes its location, growth potential, what’s happening in the local economy, changes to tax laws, and of course, profitability.

If you need help with determining your company’s worth,schedule a free consultationwith Andrew Rogerson. He can help you determine the best way to value your company and maximize its value.

How To Increase Company Valuation? 4 Value Drivers You Need To Know
What is Quality of Earnings Analysis: Sell a Business Due Diligence in California
Adjusted Financial Statements When Selling a Business in California
SDE Adjustments To Make Before Selling a Business in California
How Do I Calculate The Value Of My Business To Sell In California
What is My Business Worth? | Valuing and Selling Your Business
How Much is a Business Worth to Sell | Determine Business Worth
Income Approach Valuation | Finding Business Worth Easy
How To Value A Business Quickly: Best Business Valuation Formula
Seller’s Discretionary Earnings (SDE) Valuation | Selling a Business in California
Financial Due Diligence When Selling a Business
MSP Valuation Multiples
EBITDA Multiples for Trucking Companies
Average Multiplier For Business Valuation

Do you have any questions about how to value a company? Leave a comment below and we’ll be happy to help!

Conclusion

Using the best valuation formula to determine your biggest asset’s worth, as well as the decision to exit business ownership, is a significant life event. There could be plenty of emotions involved.

When you collaborate with abusiness brokerage firm in California, it will provide all the solutions and insights toward getting the most out of the business sale.

There are only a few ways to sell and value a business quickly in California, and an experienced business broker likeAndrew Rogersoncan guide you through the best strategy.

It is currently the perfect storm tovalue and sell your businessin California. With thegreat resignationthat started during the pandemic and the trend to continue till 2023, there are no shortages of experienced and well-financed buyers looking for the next opportunity to grab.

With acertified business intermediaryat your side, we feel confident that you willsell your businessin California quickly and at the highest price.

Andrew Rogersonis a certified business broker based in Sacramento, California.Call Toll-Free at (844) 414-9700. If you prefer, email him at support@rogersonbusinessservices.com. Andrew services the whole state of California.

Go to thenext article:Part ofbusiness valuationto answerwhat’s my business worthseries ->

February 3, 2024

FAQs

Small Business Valuation Multiples Simplified? ›

For ease of calculation, let's say that you operate a business and it can consistently generate profit before tax of say $100,000 per year. A common multiple may be around 2.0 for a small business. In this case, the value of the business is $100,000 x 2.0 = $200,000.

Show Me More ›

How do you calculate valuation multiples of a small business? ›

How much is a business worth with $500,000 in sales? ›

Use Revenue or Earnings as Your Guide

For example, if the industry standard is "three times sales" and your revenue for last year was $500,000, your revenue-based valuation would be $1.5 million. Multiplying your earnings, or how much your business makes after subtracting its costs, is another valuation method.

View Details ›

How much is a business worth with 200k sales? ›

A business will likely sell for two to four times seller's discretionary earnings (SDE)range –the majority selling within the 2 to 3 range. In essence, if the annual cash flow is $200,000, the selling price will likely be between $400,000 and $600,000.

Learn More Now ›

Is a business worth 3 times profit? ›

If the business is in a high-growth industry, for example, it may be worth 3-5 times its annual profit. If the business is in a declining industry, it may be worth less than 1 time its annual profit.

Explore More ›

What is the formula for valuation of a small business? ›

Take your total assets and subtract your total liabilities. This approach makes it easy to trace to the valuation because it's coming directly from your accounting/record keeping. However, because it works like a snapshot of current value it may not take into consideration future revenue or earnings.

How do you calculate multiples in valuation? ›

The following formulas were used to compute the valuation multiples: EV/Revenue = Enterprise Value ÷ LTM Revenue. EV/EBIT = Enterprise Value ÷ LTM EBIT. EV/EBITDA = Enterprise Value ÷ LTM EBITDA.

Discover More ›

What is a 5x business valuation? ›

A company with a 5x multiple implies an annual future return of 1/5, or 20% per year. So a buyer who is ready to pay $3 million for Business A is expecting an annual rate of return of 33%, assuming the business continues to generate $1 million each year.

Keep Reading ›

What is the formula for business valuation ratio? ›

Price earnings ratio

For example, a company with a share price of $40 per share and earnings per share after tax of $8 would have a P/E ratio of five (40/8 = 5). When valuing a business, you can use this equation: Value = Earnings after tax × P/E ratio.