During the pandemic, many businesses just barely held on and others managed to do okay. Of course, there are those businesses that have prospered because they provided the essential products and services that were in high demand. With all of these scenarios, however, there is a common and unfortunate end result……exhaustion and burnout.
In the present environment where getting back to normal and economic revival is in sight, many business owners are looking for opportunities to cash out. When egos are added to the mix, the result can be trouble when it comes to putting a dollar amount on something they created, and grossly inflated notions of what their business is worth can ensue.
You can’t put a value on a business simply by looking at its sales. Yes, usually valuations are done through multiples of sales. Most buyers, however, are interested free cash flow, and free cash flow depends on profit, not sales.
You need to begin by understanding what knowledgeable buyers are looking for. They will look first at your EBITDA, which are your earnings before interest, taxes, depreciation, and amortization. When that number is subtracted from the required yearly capital expenditures, you get a pretty good measure of free cash flow. In other words, free cash flow is the amount of cash a business generates in a year after paying all of its operating costs, expenses, and minimum new capital requirements but before covering taxes and interest and before deducting depreciation and amortization.
Even if you have solid EBITDA, buyers will want to know where that EBITDA comes from. They will look at your customer base for weight, broadness, diversity, and long term commitment. They will also look at your pricing within your given market.
Given that you have a well-run business, you can probably get somewhere between one and five times EBITDA. The exact multiple depends on various factors, such as interest rates, competition among buyers, the number of good businesses available, and other factors related to your particular business.
In summary, buyers are buying the potential to make money in the future. The more money they are likely to make, the more money they are willing to pay for your business.
