What is my business worth?

Buyers of privately held companies do not buy revenue. They buy the earnings the business produces for whoever owns it. Because private companies are run for the benefit of their owners, the profit on the tax return is rarely the profit a buyer will see. The vehicle, the family member on payroll, the one-time legal matter, the owner's own compensation — these get examined and, where they are legitimate, added back.

The result is Seller's Discretionary Earnings, or in larger companies with a management team in place, EBITDA. That adjusted number is the base the price is built on. We go through the mechanics of it in detail on how buyers and lenders read your P&L.

Owner dependence is the single most common thing holding down the value of a good company. If the customers call you, if the pricing decisions are in your head, if the key vendor relationship is a friendship of twenty years, then what is for sale is partly a job and partly you — and neither transfers.

A buyer asks a blunt version of this question: if the owner disappeared for six weeks, what would break? The closer the answer is to "nothing serious", the more the business is worth and the easier it is to finance. Reducing that dependence is slow work and it is the reason preparation pays for itself. See preparing your business for sale for the order to do it in.

A business with one customer at forty percent of sales is not the same asset as a business with two hundred customers and no one above five percent, even at the same profit. The first one carries a risk a buyer cannot control and a lender does not like. Contract terms matter here too: revenue under a current, assignable agreement is worth more than the same revenue on a handshake.

Recurring or repeat revenue — service agreements, maintenance contracts, reorder patterns — reduces the buyer's uncertainty about the first year after closing, and buyers pay for that reduction. So does a clean, current customer list that does not depend on the owner's memory.

Most transactions in the one to ten million dollar range involve a bank, usually through the SBA 7(a) program. That means the price is not only a matter of what a buyer is willing to pay; it is limited by what a lender will lend against your earnings after debt service. If the adjusted earnings will not cover the loan payment with room to spare and still pay the new owner a living, the deal does not fund at that price, however enthusiastic the buyer is.

This is why clean books matter as much as good ones, and why understated earnings are expensive. We cover the lender's view on how buyers finance the purchase.

Owners who have been told about a competitor's sale sometimes carry a multiple that had nothing to do with a business like theirs. Owners who have never been through a sale often undervalue what they have built, particularly if they have spent years minimizing taxable income. Both errors are costly. The first one leads to a listing that sits unsold and gets stale. The second leads to accepting the first offer that arrives.

A number you cannot defend to a buyer's lender is not a price. It is an opinion with a dollar sign in front of it.

There is also a floor to be honest about. Under roughly $100,000 in Seller's Discretionary Earnings, or with less than five years of documented history, a business is materially harder to sell and to finance. We would rather say so at the start than let you spend a year finding out.

A Broker Opinion of Value is a broker's supported estimate of what your business should bring in the current market, based on your adjusted earnings, the risk factors above, and what comparable businesses have actually transacted for. It is the working document behind a listing price and a negotiating position.

An Opinion of Value is not a certified business appraisal, and it is not a substitute for one. If you need a valuation for a divorce, an estate, a gift or an ESOP, you need a certified appraisal from a credentialed appraiser, and often your CPA and attorney involved from the start. We will tell you when that is the case. The differences are set out on the Broker Opinion of Value, and the local process is described on business valuation in San Antonio.