As someone who has sold businesses for over 20 years (including my own), the most common question I get asked is, “What is my business worth?” The honest answer is that value is very buyer dependent, as all have varying motivations. However, the bedrock of business value is cash flow.
There are many types of cash flows buyers use to determine value, but the most common is adjusted earnings before interest, taxes, depreciation, and amortization (Adjusted EBITDA). This is calculated by adding back expenses to EBITDA to exclude items that do not represent ongoing operations.
Common adjustments include one-time expenses, excessive owner compensation, discretionary expenses, charitable contributions, and non-market rent expenses. To buyers it indicates the annual return on investment in your company. An industry, company specific multiplier is applied to to adjusted EBITDA to estimate a value.
Buyers want to see at least three years of demonstrated cash flow. If you are in a business cycle sensitive business, a five year or longer lookback may be required. If your business is growing rapidly, a trailing twelve months (TTM) is the most relevant measure.
ThielGroup is a business advisory service that provides brokerage, M&A, and valuation services throughout upstate New York and New England.
Interested in discussing how we can help you sell your business? Give me a call. I have been selling companies for 20 years!