Mar 28, 2024 | Business Appraisal, Business Valuation, Small Business, Valuation Multiples
The United States has the largest economy in the world. This could not be true without small businesses. Studies show that over 99% of all businesses in America are considered small businesses. Operating a small business can be very rewarding. If you are preparing to buy, grow, or sell a small business, it is beneficial to learn how to value a small business. This includes understanding valuation multiples for a small business. As a professional business appraiser, Peak Business Valuation specializes in valuing small businesses using valuation multiples. If you have any questions about valuing a small business, schedule a free consultation with Peak today!
See also How to Value a Small Business.
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Valuing a Small Business
When valuing a small business, there are many factors to consider. This can be a complex process. To understand how to value a small business, it is best to receive a business valuation. If you are looking to buy a small business, a business valuation can help you determine a fair purchase price. If you are selling a small business, a business appraiser can help you set a reasonable listing price. In addition, business appraisers assess the risks and opportunities of your small business during a business valuation. This information can help you take steps to increase the value of a small business.
Valuation experts may use various valuation approaches when valuing a small business. The market approach is one of the most common small business valuation methods. This approach relies on valuation multiples to compare a small business to similar competitors. In this article, we discuss common valuation multiples for a small business. Keep in mind, that this is only a guide. To know which multiples apply to your small business, obtain a business valuation.
Peak Business Valuation is happy to help! As a professional business appraiser, we value thousands of small businesses throughout the country. Peak can provide you with a business valuation for a small business. Additionally, we can discuss any questions you have about valuing a small business. Schedule a free consultation with Peak Business Valuation today!
Valuation Multiples for Small Businesses
The following image displays common market multiples for small businesses. Please note that these numbers are only averages. As such, they may not be suitable for your small business. To learn what multiples for a small business are best, receive a business valuation. Peak Business Valuation is here to help. Schedule a free consultationto get started.
Disclaimer: These multiples are for educational purposes only. As such, the information provided does not constitute valuation advice. These multiples do not represent the valuation opinion of Peak Business Valuation or its valuation professionals. Instead, seek the guidance and advice of a qualified business valuation professional about any matter in this article.
What is a Valuation Multiple?
Valuation multiples are financial ratios. They calculate the value of a small business by comparing its financial performance to that of similar companies on the market. For example, the SDE multiple is common when valuing small businesses. The SDE multiple measures the value of a small business based on its seller’s discretionary earnings. Valuation experts assess the SDE multiples of similar businesses to determine an accurate range of value for the small business.
For instance, a small business has $195,000 in SDE. If it transacts at a 1.68x SDE multiple, the small business would have an implied value of $327,600 ($195,000 times 1.68x). On the other hand, a 1.96x multiple would suggest that the value of the company is $382,200 ($195,000 times 1.96x).
Peak Business Valuation, business appraiser, regularly helps individuals looking to buy, grow, or sell a small business. When valuing a small business, our valuation experts often work with valuation multiples. In the following paragraphs, we share an average range of valuation multiples that small businesses may transact at. Since each business is unique, the value range may vary between businesses. Below, we highlight SDE, EBITDA, and REV multiples for small businesses.
SDE Multiples for a Small Business
Average SDE Multiple range: 1.5x – 3.0x
Small businesses generally transact between an SDE multiple range of 1.5x – 3.0x. Business appraisers apply the multiple to a small business’s SDE to determine an implied value. The equation is as follows.
SDE X Multiple = Value of the Business
For example, a small business generates $400,000 in seller’s discretionary earnings and transacts at a 2.10x multiple. In this case, the value of the small business is about $840,000.
$400,000 X 2.10x = $840,000
Valuation analysts at Peak Business Valuation often use SDE multiples when valuing a small business. To determine a small business’s SDE, valuation analysts add any expenses that may not be incurred by the new owner to the small business’s operating profit. Some common adjustments include non-related business expenses or non-recurring, personal expenses, and a fair owner’s compensation. This helps business appraisers determine the small business’s cash flow potential. This is critical when valuing a small business.
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EBITDA Multiples for Small Businesses
Average EBITDA Multiple range: 3.00x – 5.00x
The average EBITDA multiples for a small business typically fall between 3.00x – 5.00x. Valuation experts apply the multiple to the company’s EBITDA to determine its fair market value. See the calculation below.
EBITDA X Multiple = Value of the Business
Suppose a small business receives $250,000 of EBITDA. If the business transacts at an EBITDA multiple of 3.95x, the company is valued at $987,500.
$250,000 X 3.95x = $987,500
EBITDA multiples represent a business’s earnings before interest, taxes, depreciation, and amortization. Using this multiple helps calculate a small business’s return on investment (ROI). Valuation experts often use EBITDA multiples for small businesses since they help normalize differences. Normalized ratios also provide a more accurate projection of a small business’s future cash flows.
REV Multiples for a Small Business
Average REV Multiple range: 0.50x – 2.00x
Small businesses typically transact between an average revenue multiple range of 0.50x – 2.00x. Business appraisers can determine the implied value of a small business by multiplying the company’s revenue by the multiple. See the following equation.
Revenue X Multiple = Value of the Business
For instance, a small business generates $1,500,000 in revenue. If it transacts at a 0.72x multiple, the small business is worth approximately $1,080,000.
$1,500,000 X 0.72x = $1,080,000
REV multiples reflect the total amount of revenue a small business generates. At Peak Business Valuation, our valuation experts often rely on the cash flow multiples – SDE and EBITDA. However, the expert will determine which methods and multiples are best for your small business as part of a small business valuation.
Summary
Understanding how to use valuation multiples is beneficial whether you are preparing to buy, expand, or sell a small business. To determine which multiples are ideal for your business, receive a business valuation for a small business. As part of a business valuation, a business appraiser calculates the fair market value of a small business. In addition, they may highlight the small business’s strengths and weaknesses. This information is important and can help business owners understand how to maximize the value of a small business.
Peak Business Valuation, business appraiser, regularly works with small businesses. We can provide you with a small business valuation. Peak is also happy to answer any questions you may have about valuation multiples for a small business. Start now by scheduling your free consultation with Peak Business Valuation below!
Be sure to also check out Valuing a Small Business and How to Value a Small Business.
