One of the most important tasks is determining the value of your business. This process is both a science and an art. Naturally, as your life’s work, you will have an emotional attachment to your business, which affects your perception of its value. Unfortunately, more often than not, this is unlikely to match the actual market value. This is often a jolt to your system, so be prepared for a possible shock. If it’s an asset sale, you should determine what assets you wish to sell and those you wish to keep.
The sales price is critical to achieving a good return on your investment. Marketing the sale of the business correctly to provide maximum exposure is extremely important. This enables the business to be sold for the highest value. Sales formulas are comprised based on a Multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Determining the EBITDA is the start in measuring a company's potential value in a sale.
Recent sales of comparable businesses (or ‘“comps”) comprise this multiple of EBITDA. This starts by identifying similar businesses that have sold in the area. Small businesses typically trade for between 1x to 4x EBITDA. The difference in the multiple is generally the result of a variety of characteristics specific to your business industry, type and qualities.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) is the figure that offers a reliable estimate of the kind of cash a business generates to pay down debt, pay taxes and offer a return to investors.
Sellers' Discretionary Income (SDI) or Seller's Discretionary Cash Flow (SDCF), on the other hand, is a figure used more often in smaller businesses because it accounts for the salary that the company's owner pays himself, along with any other benefits or perks like a company car or life insurance policy.
In other words, SDCF = EBITDA + owner's salary + perks and benefits.