How is a Business Valued?
The general rule of thumb for valuing engineering, land surveying, and architectural businesses is that the value is between 40% and 60% of gross sales. A more accurate answer is that the business has a value of two to three times the Seller's discretionary cash flow or five to six times the adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). These multiples increase for larger businesses. Learn more below!
Valuing a business is very similar to valuing commercial real estate. The cash flow is calculated using the federally filed tax returns. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) is the standard for larger businesses and is the term most people know. When it comes to closely held businesses, the cash flow that is calculated is Seller’s Discretionary Cash Flow (SDCF) or Seller’s Discretionary Earnings (SDE). Closely held businesses are operated differently than larger businesses and the owner can pull cash from the business in many different ways. The owner call pull money from the business as salary, net income, and other ways. SDE and SDCF is designed to capture all of the different methods. The SDE or SDCF is than multiplied by a multiple. Most multiples are between two and three. In English, if the new owner did not take a salary and took all of the earnings to pay the former owner, the business would be paid in full between and three years.