What is my business actually worth?

The short version

• Buyers pay for what the business earns for its owner. Not for what it takes in.
• That figure has a name: seller's discretionary earnings. It is profit, plus your pay, plus the things the business pays for that are really yours.
• The price is a multiple of that figure. The multiple is a judgment about risk.
• It is always a range. Anyone who hands you one number is guessing.
• The number in your head is probably built on revenue. That is the usual mistake.

The number in your head

Most owners carry a number. It came from somewhere. A competitor sold and a rumor went around the supply house. A cousin got some multiple of something. A broker mentioned a figure at a trade show ten years ago and it stuck.

The number is usually built on revenue. Revenue is the wrong base. Two shops with the same revenue can be worth very different amounts, and the difference is what is left for the owner at the end of the year.

What the business pays you to own it

Start with the profit on the tax return. Add back your own salary. Add back the personal expenses the business carries: the truck you drive home, the phone, the health insurance, the trip that was partly a conference. Add back costs that will not repeat, like a lawsuit or a roof.

What you have is seller's discretionary earnings, usually shortened to SDE. It is the total benefit one owner-operator takes out of the business in a year. It is the first number a buyer's lender will ask for, and it is the number a buyer is actually paying for.

Illustrative arithmetic. A plumbing company brings in $1.4M. The tax return shows $60,000 of profit. The owner draws $110,000 in salary. The business pays $18,000 of costs that are really personal. SDE is $188,000.

A second plumbing company brings in the same $1.4M. It also shows $60,000 of profit. The owner draws $40,000 and there is nothing to add back. SDE is $100,000.

Same revenue. Same trade. Same town. One is worth close to twice the other, and neither owner would have guessed that from the top line.

Then a multiple, and the multiple is about risk

Buyers pay some number of years of SDE. That number is the multiple. A business that sells for two and a half times SDE of $200,000 sells for $500,000. The multiple is not a reward for hard work. It is a judgment about how confident a buyer can be that the earnings keep arriving after you leave.

Size tends to move the multiple more than the trade does. Larger earnings draw more buyers and more lenders, and competition raises the multiple. Within a size band, the questions are the same everywhere:

• Does the business run for a month without you?
• Do customers come back on their own, or does every job start from zero?
• How much of the revenue comes from the largest customer?
• Can an accountant verify the books, so a bank will lend against them?

Each of those is a piece in this track. Each of them is something you can move. Where businesses like yours actually land is a separate piece, with the sources attached.

Why it is a range and never a number

Two buyers looking at the same business will pay different amounts. They have different plans, different financing and different views of the risk. A range is honest. A single number is a guess with confidence attached.

The range narrows as more is known. Clean books narrow it. A customer list with no single name too large on it narrows it. A year of the business running without you narrows it a great deal. Nothing narrows it to one figure until a buyer signs.

What to do with the number

Nothing, yet.

An owner who gets a number before knowing what they want does something unhelpful with it. Some owners hear a low number and stop thinking about the whole subject for five years. Some hear a high number and stop working on the business. Both reactions cost more than the number was ever worth.

The number is a starting point. The useful question is the one in the next piece: what moves it, and how much of that is in your hands.