Have you ever thought about selling your business? Most small business owners have thought about it at least once or twice. Some owners build a business specifically with the thought of selling it eventually. Whether you are looking to sell your business as quickly as possible, or you expect to pass it on to your next of kin, knowing the market value of your brand is a valuable measure of your business.
As a business investor, the financial measure which typically means the most is 12-month rolling EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Basically, this is the amount of profit that is being generated by the business operation. If a professional buyer was going to make an offer on your business, they would typically offer you the business' EBITDA times a multiple. So, for example, if your business' EBITDA is $50K and you are in the fitness industry (where a typical multiple is 2.5x to 3x), they may offer you 2.6 times your EBITDA which would be an offer price of $130K for your business.
The reason for EBITDA being a calculation before financial concerns is primarily to consider debt. Let's take the case above. If the price of the business is $130K, but there is $50K in debt, then the buyer would pay $50K to resolve the debt (or they could choose to assume the debt) and $80K to the owner. This is a key element that many owners don't consider during a sale. If you've ever seen the very popular television show "Shark Tank", many times the deals fall apart because the owners do a poor job of valuing their business. Emotions and "blood, sweat & tears" get added into the price, but the investor's aren't investing in emotions and intangibles, they are investing in a business.
There is one additional consideration that comes with the valuation of a small business: people versus processes. Let's go back to our $50K EBITDA business (above example): if I'm an investor looking to purchase the business, I want to know how much of that $50K comes from great processes and how much comes from having great people. While it is important to have both, a lack of processes can make for a scary investment. If the business is making $50K because there is an amazing sales manager (which happens frequently with a change of ownership), what happens if that manager decides to leave the business? However, if the business is successful because there are terrific systems in place or relationships with key vendors who are providing strong systems, then it is a more stable investment. Even better, if there's a system that can be scaled and quickly implemented to additional locations, that's when the business can demand a premium, because an investor with more capital could grow the business quickly. In general, the reason people so frequently buy into franchise models is because the franchise provides a strong system which can be replicated.
Despite many of our best instincts, hiring great people is a big help for the business, but it does not add lasting value to your business. Building systems and strong vendor relationships is the way to build the value of your business.