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How to Determine “Business Value”?

by Nilesh Dalwadi on September 20, 2023
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When it comes to a small business sale, a most confusing question to a seller is “How much my business can get me?” and to a buyer is “What price should I offer?

There are various opinions and methods prevailing in the market to value a business. Some are logical and some are just popular. Among the most prevalent methods are the use of income or revenue multipliers, although they are less logically sound but widely accepted. For instance, multiplying gross annual revenue by two or three, or EBIT(Earning Before Interest & Taxes) by four or five.

Most logical one is the multiplier SDE – Seller’s Discretionary Income. Simple meaning of SDE is how much a business owner operator can make annually which includes his own salary? SDE is multiplied with a number to determine the business value, and that number is derived from recent sales of similar businesses.

Actually, there are various other factors besides the business numbers which also play important role in determining the business value like, type of business, trade name, goodwill, current market value of business asset, lease agreement, competition, growth potential and some more. That’s where an experienced professional’s role is vital in assessing a business value !

Valuing a business is a very complex subject and not possible to derive a single consented value. It defers with individuals based on their objectives in the business selling process. Ultimately, like any other product or service, the market dictates the value of a business. The prevailing demand and supply dynamics at the time of sale also remain an influential factor in establishing the current value of a business.

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