If you’ve considered selling your restaurant you’ve no doubt wondered “How much is my small business worth?” There are several different methodologies for valuing small businesses. We focus on determining what the fair market value is. Why? Because the definition of fair market value is:
“The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.”
The three primary ways to determine the fair market value of a small business are the asset approach, income approach, and market approach.
At the end of the day, only a buyer can tell you what your business is worth, but Restaurant Brokers of Michigan can help you determine where offers are likely to land. So, how do we value restaurants?
- We calculate seller’s discretionary earnings or “SDE.” This is a company’s profits before interest, taxes, non-cash expenses (think depreciation), owner compensation and benefits, non-recurring expenses, and any non-related income or expenses. A buyer will typically average the past three years SDE numbers with the most weight on the most recent year.
- Determine the right multiple. Next, we look to our various market data resources to find the multiple of earnings that similar businesses were sold. For example, if a company has SDE of $150,000 and it sold for $300,000, it sold for 2x seller’s discretionary earnings. The typical range for a small business is 1.5 to 3x SDE. Higher earnings, fast growth, and stellar margins can all help to increase the multiple.
- Bring it all together. Next, we determine the expected value of the business by multiplying the company’s SDE figure by the determined multiple. We typically use a range of multiples to show how different buyers are likely to approach valuation.
Click Here to Contact us to get started.
Click Here to download a sample valuation.