What is the Primary Asset Being Transferred When a Business is Sold?February 16, 2017
When you’re trying to assess the value of a business for sale, there’s actually only one asset to be considered—cash flow. The vast majority of business brokers will assess your business on this one asset’s evaluation, and it’s also what any potential buyer will be looking for.
Inventory, equipment, even associated real estate can all be encompassed in this single factor, because cash flow is of course dependent upon those factors. A business with no notable cash flow despite an abundance of other associated assets simply isn’t worth investing in as a business. Such a business would be better to most brokers bought and sold piecemeal than as an inefficient whole.
More specifically, a smaller business’s value for sale is a factor of its Seller’s Discretionary Earnings, a cash flow assessment of net income before taxes, interest, owner compensation, non-recurring expenses, and certain other costs. The vast majority of businesses will sell for between two and three times the annual SDE. The exact multiple is dependent upon key factors such as the stability of the business and its industry, location, historical earnings, and similar factors. The SDE is the key evaluation, multiplied based on how likely it is for the business to maintain that SDE or grow substantially in the future.
If other assets are considered at all, it’s in this assessment based upon SDE; assets in good working order suggest a business that will remain profitable, and thus will allow for a higher multiple of the SDE. Assets of dubious value will lead to a lower assessment. But it all starts from the SDE—if the cash flow is low, then any multiple of cash flow will also be low, whatever the assets involved.
While this is by far the most common way to value a business for sale, it’s not the only one. Larger enterprises are sometimes assessed based on the EBITDA, the Earnings Before Interest, Taxes, Depreciation, and Amortization, selling for a multiple somewhere in the range of 4 to 6 times that number. This is far less common for a number of reasons—and is still ultimately a factor of cash flow.
If you’d like to learn more about the value of a business for sale, you can contact Prodigy Partners today. Our experience as a Dallas, Texas business broker will help you obtain a fair price on your business dealings.