Earnings First, Then a Multiple
Almost every valuation of a privately held company starts with one question: how much money does this business produce for its owner each year?
For companies where the owner still runs things, the measure is seller's discretionary earnings, or SDE. It's the profit plus the owner's salary, benefits and any personal or one time costs running through the books.
Once there's a real management team and the owner could step away, buyers switch to EBITDA, which assumes someone is paid a market salary to run the place.
That earnings figure is then multiplied by a number that reflects how risky the buyer thinks the income is. Lower risk, higher multiple.
Add Backs Can Move the Number a Lot
Your tax return is built to keep taxable income low. A buyer's model is built to show what the company really earns. The gap between them is the add backs.
Common ones include your own salary above a market wage, a family member on payroll who doesn't work there, a car or phone used personally, a one time legal bill, or a big repair that won't happen again.
Each add back needs a paper trail. Buyers and SBA lenders will accept the ones you can prove and quietly throw out the rest.
An add back you can't document is just a story, and buyers don't pay multiples on stories.
Why Would Two Similar Companies Sell for Different Multiples?
Because buyers price risk, and risk hides in the details. Two cabinet shops with the same profit can sell far apart if one depends on a single builder and the other has hundreds of homeowners.
These are the things that usually pull a multiple down:
- One customer above roughly 15 to 20 percent of sales
- The owner holding every key relationship
- Revenue that dropped last year without a clear reason
- A lease that ends soon, with no renewal in sight
- Equipment that is near the end of its life
Fixing even one of these before you sell can be worth more than another year of growth.
Asset Sale or Stock Sale?
Most companies selling for under about $2 million change hands as asset sales. The buyer purchases the equipment, the name, the customer list and the goodwill, and leaves the old entity with you.
Larger deals more often sell as stock or membership interest sales, where the buyer takes the whole entity. Each structure taxes you differently, so bring your CPA in before you agree to one.
In Ohio, an asset sale also brings successor rules for sales tax, payroll withholding and workers' comp. Our seller paperwork guides cover each one.
What a Broker's Estimate Is, and What It Isn't
A broker's estimate is a market opinion: what buyers like the ones active today would likely pay. It isn't a certified appraisal, and it isn't a promise.
It's built to answer one practical question: does a sale make sense now, or should you spend a year getting ready? For estate planning, a divorce or an ESOP you may need a formal appraisal instead.
To see how the steps fit together, read how to sell a business in Columbus. For your own number, use the value form or call (614) 555-0148.