How to Value a Small Business for Sale: What You Need to Know

January 22, 2018September 28, 2022 What Your Boss Thinks

Did you know that you can sell to your employees if you want to exit your small business quickly? This is just one of the many ways you can successfully sell your small business without added stress.

Let’s take a look at how to value a small business for sale.

Know Your Small Business Market Value

You’ll want to have a clear idea of the market value of your small business. There are many variables that factor into this value, including:

Sturdiness of the foundation
Financial productivity
Conflict resolution skills and programs in place
Options for personal and professional growth
Licensure options
Potential for expansion
Supply and demand
Interventions to alleviate office drama

These are just a few of the variables that can play into the strength of your small business’ market value. Here are some steps you should take to ensure you have a well-rounded idea of the value of your small business.

Step 1: Organize Your Financial Statements

As a business owner, your strengths probably lie in managing your small business, not in the accounting side of things. So, you might want to hire someone who specializes in the financial aspects of a business.

You’ll want to make sure you take into account:

Cash flow statement
Comparision of assets and liabilities
Business owner’s cash flow
Your business’ gross revenue, costs and gains for each year in business

Each of these aspects of your affects your business’ market value.

2. Get an Idea of Tangible Assets for Your Small Business

When you tally up your tangible assets, be sure to include all:

Relevant business equipment
Office furnishings and fixtures
Business inventory

Potential buyers will be very interested in your tangible assets. They’ll want to know everything that comes with their purchase of your small business.

3. Draw up Your Statement of Seller’s Discretionary Earnings (SDE)

When you are learning how to value a small business for sale, you won’t want to overlook your SDE statement. This statement is the foundation for your asking price.

Your SDE statement will include your small business’ yearly:

Revenue
Cost of sales
Expenses
Net income
Adjustments

This statement will demonstrate the fullest extent of your small business’ earning power. It will be the most important piece of data for your potential buyers.

4. Approximate the Earnings Multiple

You’ll want to convey your small business’ appeal by using a earnings multiple scale. You’ll rate your small business on a scale of 1-4 in the areas of:

Most current performance
How easy it will be for a buyer to transition your business into their business
Products and/or services
Repeated revenue
Staffing
Reputation and brand recognition
Location
Clarity of financial data
Clientele

Your potential buyers will be most interested in how much they will be receiving for their purchase. The more you can offer evidence that this investment will be in their best interest, the more likely they will be to make you an offer.