Selling Your Business – Pricing Fundamentals

Do you know what price your business will command on the market?  I’ve spoken here before about subjective factors. Take into account the psychological nature of buyers. They are typically intelligent and have been successful. They don’t part with their money frivolously, are cautious and definitely don’t want to overpay for anything. They expect a reasonable if not superior rate of return on their investment. A four to five year payback period on a business acquisition investment would be normal.

What is Average in the Pricing of a Business? The “average” I am discussing refers to the marketplace of middle-sized privately held businesses. These are businesses that range in sale from $3 million to $50 million. In my 30 years of deal doing, the vast majority of the over $500 million in transactions I have closed have fallen into a rather tight price range. That range has been 4 to 5 times Income before Interest, Taxes, Depreciation and Amortization (IBITDA) with IBITDA adjusted for reasonable items such as owner compensation above replacement salary level and one-time, non-reoccurring investment expenditures. If one does a calculation of payback on investment, this formula will lead to the four to five year payback period mentioned in the previous paragraph (assuming IBITDA remains the same).

I suggest business owners average the last three years of their IBITDA for a rough estimate of value when planning. In today’s market this initial value based upon the multiple of IBITDA is often called the ‘Enterprise Value’ of the business. Any existing debt is deducted from the Enterprise Value to derive the net proceeds before taxes to the seller.

Here are two other methods for determining a mean price for your business. Next week we’ll talk about factors that might swing a business towards the ends of the scale, both up and down.

 

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