How to Prepare to Sell Your Business in 2025: What Every Connecticut Business Owner Needs to Know
f you’re a business owner in Connecticut thinking about selling your company in 2025, now is the time to start preparing. The market has shifted significantly in recent years, and buyers are more selective than ever.
If you’re a business owner in Connecticut thinking about selling your business in 2025, now is the time to start preparing. The market has shifted significantly in recent years, and buyers are more selective than ever. Whether you're planning an exit due to retirement, a strategic shift in your industry, or to simply move onto something new, starting to prepare today for the rigorous M&A process can help you increase your sale price and improve your levels of success to achieve a life changing deal.
At Pinewood Advisors, widely regarded as the best business broker in Fairfield County, we take a high-touch, low-volume approach to business sales. Our clients work directly with a senior advisor — not a junior analyst — throughout the entire process. We specialize in helping owners of small to mid-sized businesses prepare, position, and sell their Connecticut companies with confidence.
Why 2025 Is a Unique Year for Business Sales
After the post-pandemic spike in valuations seen in 2021 and early 2022, the M&A landscape has become more difficult to navigate. Buyers are met with higher interest rates, tighter bank lending criteria, and declining seller earnings to assess and work into their valuation and deal structures.
Buyers are conducting deeper due diligence, hiring CPA firms and consultants to help them value companies and develop complex deal structures. As a result, Connecticut business brokers must bring only well-prepared companies to market to command top-dollar offers for their clients.
This is Pinewood’s approach.
That makes it even more important to begin preparations months — or even years — before you plan to sell.
Buyers are looking for stability, clean financials, and a strong management team that can continue operations after the owner exits. If you're thinking, “How do I sell a Connecticut business in today’s market?” — the answer starts with planning, transparency, and the right advisory partner.
How to Prepare Your Business for Sale
Clean Up Your Financials
Ensure your books are accurate, up to date, and professionally prepared. Eliminate personal expenses from your P&L, and organize financial statements, tax returns, customer data, payroll records, and your line of business software data for the past 3–5 years. A reliable small business valuation hinges on clean, defensible financial data. And a buyer’s ability to secure financing to buy your business largely depends on the selling business’s financial statements .Increase Operational Independence
While you have worked in your business for years and it has provided a level of income and freedom that many buyers can only dream of, if your business can’t run without you, it’s less valuable to a third party buyer. A strong seller however, will mitigate this “key man” risk by preparing a library of processes that allow employees and vendors to do business in the owner’s eventual departure and transition to new ownership. Document systems, train managers, and create processes that allow the company to function without the owner’s daily involvement are all ways to begin the transition plan.Boost Recurring Revenue & Customer Diversity
Buyers value predictability. And their acquisition offers will reflect the acquired business’s revenue model, profitability, recurring nature, and retention. Successful sellers reduce their business’s success on reliance on a single client or vendor and focus on building long-term contracts and recurring revenue streams with multiple customers, even across multiple industries, geographies, and demographics.Work with a Trusted Business Broker
A seasoned advisor can guide you through valuation, buyer outreach, and deal structuring. At Pinewood Advisors, we work with only a select number of clients at a time — ensuring we can deliver personalized attention and a high likelihood of closing.
Your Next Step
If you’re wondering how much your business is worth or whether now is the right time to sell, start with a confidential conversation. Pinewood Advisors offers a free initial consultation and small business valuation for qualified Connecticut business owners. As the best business broker in Fairfield County, we help owners across the state sell their businesses for maximum value and peace of mind.
Contact us today to take the first step in your exit journey — and make 2025 your most rewarding year yet.
5 Ways to Sell Your Connecticut Business for the Most Value
If you’re a business owner in Connecticut and considering selling your business, maximizing its value is likely your top priority. At Pinewood Advisors, we specialize in helping retiring business owners through business valuation, succession planning, and finding the right buyers.
Here are five ways to ensure you sell your Connecticut business for the highest possible value:
1. Get a Professional Business Valuation
One of the most crucial steps in selling your business is getting a professional business valuation. Understanding the true value of your business is essential for setting a competitive asking price. At Pinewood Advisors, our experienced business brokers in CT will conduct a comprehensive analysis of your business’s financials, market position, and growth potential to determine its fair market value. This ensures you don’t undervalue your business or scare off potential buyers with an unrealistic price. Another consideration is how your profit and loss statement will support a buyer’s ability to get bank financing (SBA loan) to buy your business. The more profits and positive cash flow, the greater buying power your eventual business buyer will have, and the greater the chance of a successful deal will come your way.
2. Enhance Your Business’s Financial Performance
Potential buyers are looking for businesses with strong financial performance and growth potential. Equally important is showing a continuous strengthening of your revenue, profits, and cash flow. Before listing your business, work on improving your financial records, reducing unnecessary and personal expenses, and boosting profitability and positive cash flow. Our business brokers in Connecticut can provide guidance on making strategic improvements that will make your business more attractive to buyers, even years before you are ready to sell.
3. Prepare Thorough Documentation
When selling your business, transparency is key to buyers, their CPAs and legal advisors, and their investors or lenders. Prepare detailed documentation, including financial statements, tax returns, employee records, and contracts. This not only builds trust with potential buyers but also speeds up the due diligence process. As a business broker near you, Pinewood Advisors can assist you in organizing and presenting these documents professionally, highlighting the strengths of your business.
4. Plan Your Exit Strategy
A well-thought-out exit strategy is crucial for a smooth transition. Succession planning is a vital part of this process. Identify potential successors within your organization or your friends and family circle, and consider training new management to take over after the sale, even if they aren’t the eventual buyer. Having trained management level staff in your company helps buyers and lenders get more comfortable with executing a business purchase. This also reassures buyers that the business can continue to operate successfully without your direct involvement. Our team of business brokers in CT can help you develop a solid exit strategy tailored to your specific situation.
5. Continue To Market Your Business
Finding the right buyer is critical to maximizing your business’s value. Effective marketing can attract a larger pool of qualified buyers. Not only does marketing typically result in more revenues and profits, but it helps buyers walk into a business with positive upward momentum (versus them having to invest in marketing after the buy the business). Utilize digital advertising like Facebook, Yelp, and Google Ads and SEO, engage with local business communities, and leverage your professional network, get your name out there!
Summary
Selling a business is a complex process that requires careful planning and execution. By working with experienced business brokers in Connecticut, you can navigate the challenges and secure the best possible outcome for your business sale. If you’re ready to take the next step, contact Pinewood Advisors today. Our team is here to help you achieve your business goals and ensure a successful transition.
Top 9 Reasons to Get a Business Valuation Today
If you own a small business and you are looking to sell it, retire, or move onto the next best thing…you have probably wondered over the years, how much your business is worth.
Whether you have 10 more years in business or you want to sell your business soon, here are nine compelling reasons why understanding the value of your business is crucial.
Facilitating Business Sales: When selling your business, a professional valuation provides an unbiased assessment of its fair market value, aiding in setting a realistic asking price and bolstering confidence during negotiations, benefiting both you and potential buyers. Additionally, lenders often require this valuation for financing purposes.
Strategic Exit Planning: Every business owner will eventually exit their venture. A valuation serves as a foundational step in planning your future by assessing your assets, revealing any gaps, and aiding in the creation of a strategic plan to achieve your goals.
Identifying Growth Opportunities: Valuations uncover avenues for revenue growth, such as introducing subscription-based products, while also pinpointing areas for cost reduction, improving cash flow, and enhancing overall operational efficiency.
Attracting Investors: A recent business valuation provides potential investors with a comprehensive understanding of your business's financial health, structure, and future earning potential, making it an invaluable tool for attracting private equity groups or venture capitalists.
Securing Financing: Whether for equipment purchases, renovations, or meeting payroll, a professional valuation, accompanied by detailed financials, streamlines the financing process by providing lenders with a clear picture of your business's worth and financial viability.
Insurance Needs: Detailed valuations aid in determining the appropriate insurance coverage for your business, influencing coverage amounts and potential payouts for scenarios like co-owner life insurance agreements or damage from natural disasters.
Navigating Divorce Proceedings: During divorce proceedings, a neutral business valuation assists both parties and the court in equitable distribution of assets, ensuring informed decisions regarding the inclusion of the business in asset allocation.
Buying Out Partners: In cases where a partner seeks to divest ownership, a professional appraisal determines a fair market value for the buy-out, ensuring fairness and clarity in the transaction.
Succession and Estate Planning: Valuations are vital for succession or estate planning, enabling you to make informed decisions about the future of your business in the event of unforeseen circumstances, such as death or incapacitation.
Just as regular health check-ups are essential for maintaining physical well-being, periodic evaluations of your business's value are crucial for navigating potential investment opportunities, financial challenges, and strategic decisions with confidence and clarity.
Want to get your business value?
FAIL: Top 3 Reasons Why Business Sale Deals Fall Through
There are many reasons why business sale deals fall through. This post covers the top 3 reasons in detail and how to avoid them altogether when selling your small business.
Business acquisition deals are complex transactions that involve multiple parties, assets, and financial considerations. Despite the best intentions of both buyer and seller, these deals can fall through for various reasons. In this article, we'll examine the top three reasons why business acquisition deals fall through.
Due diligence issues
Due diligence is the process of thoroughly investigating a business before making an acquisition offer. During this process, the buyer may discover information that leads them to reconsider the deal or renegotiate the terms. For example, the buyer may uncover financial problems, legal issues, or operational challenges that were not initially disclosed. This can lead to a breakdown in negotiations or a decision by the buyer to walk away from the deal.
Disagreements over price and terms
One of the most common reasons for a business acquisition deal to fall through is disagreements over the price and terms of the transaction. The buyer and seller may have different expectations regarding the value of the business and the terms of the deal, and these differences can be difficult to reconcile. If the buyer and seller cannot agree on a fair price and reasonable terms, the deal may fall apart.
Financing problems
Financing is a critical component of most business acquisition deals, and a lack of financing can cause a deal to fall through. The buyer may be unable to secure the necessary financing to complete the transaction, or the terms of the financing may be more onerous than expected. Similarly, the seller may require financing to complete the deal, and if they are unable to secure it, the deal may fall apart.
Conclusion
In conclusion, the top three reasons why business acquisition deals fall through are due diligence issues, disagreements over price and terms, and financing problems. To reduce the risk of a deal falling through, both the buyer and seller should carefully consider these factors during the acquisition process. By working together and being transparent about their expectations and concerns, they can increase the chances of a successful outcome.
Your Big Pay Day: How Small Business Acquisitions Are Structured
Everyone wants an “all cash” deal when selling their business. But what is the most realistic deal you can achieve?
If you are considering selling your business someday you have probably been researching topics like business valuation, business brokers, M&A terms, and business sale structures. Small business acquisition deals refer to the purchase of an existing small business by another party. The structure of these deals can vary widely depending on various factors such as the size of the business being purchased, the industry in which it operates, and the financial position of the buyer. However, there are several common elements that are frequently found in small business acquisition deals.
Cash Down Payment
The most straightforward form of payment in a small business acquisition deal is a cash down payment. The buyer may choose to pay a portion of the purchase price in cash upfront, with the remainder being paid over time in a variety of ways.
Seller Financing
In some cases, the seller of the business may choose to finance a portion of the purchase price. This means that the seller provides a loan to the buyer, which the buyer pays back over time. The terms of this financing can vary, including the interest rate, the length of the loan, and the payment schedule.
Bank Loans
Another common form of financing in small business acquisition deals is a bank loan. The buyer may apply for a loan from a bank to help finance the purchase of the business. This loan will typically have terms similar to those of a traditional loan, including an interest rate, a repayment period, and a monthly payment schedule.
Earn Outs
An earn out is a type of deal structure in which the buyer and seller agree on a portion of the purchase price being paid based on the future performance of the business. The seller may receive a portion of the purchase price after a specified period of time if the business meets certain performance milestones. This type of structure provides an incentive for the seller to continue working to grow the business after the sale, as the success of the business will directly impact the amount of money they receive.
Summary
In conclusion, small business acquisition deals can be structured in a variety of ways, including cash down payments, seller financing, bank loans, and earn outs. The structure of a deal will depend on the specific circumstances of the transaction, including the financial position of the buyer and the size of the business being purchased. Regardless of the structure, it is important for both the buyer and the seller to understand the terms of the deal and to consult with experienced professionals to ensure that their interests are protected.
What Are Typical M&A and Business Broker Fees?
If you are looking to sell your business you may be concerned with business broker and M&A advisor fees.
If you are looking to sell your business you may be concerned with business broker and M&A advisor fees.
While the media portrays the M&A world as a glamorous, high-flying, elite “good old boys” club of the 1980s, we can assure you that the small business M&A advisory world is quite the opposite.
Small business brokers and M&A advisors are typically not working in fancy Wall Street offices, wearing designer suits, and making billions of dollars like many of the largest Bulge Bracket investment banks do.
In this post we will cover the reality of business broker fees and M&A advisory fees as they relate to small business transactions.
This post covers the following topics:
The role of the small business broker
Differences between business brokers and M&A advisors
Business broker and M&A advisor fees
How to get the most from your business broker
The Role of the Small Business Broker
Small business brokers and M&A advisors are business professionals whose duty is to represent their client’s best interests in preparing and selling their business.
For business sellers, this means that business advisors must commit themselves to helping their clients achieve the greatest outcome with utmost discretion, confidentiality, and care.
After all, the business owner has poured their life savings into the business, employed dozens and even hundreds of trusted employees, including friends and family, and spent many early mornings, late nights, weekends, and holidays working on their business to support their families.
Differences Between Business Brokers and M&A Advisors
While the service that brokers and advisors provide achieves the same outcome (buying and selling businesses), the primary difference is in the size of the transactions that business brokers and M&A advisors execute.
Small business brokers generally work with businesses in the $1-25 million revenue or enterprise value. This is the majority of all businesses in the U.S.
Once the revenues and valuation of a business exceed $25 million (though some say above $50 million) you will most likely require the support of a more specialized firm, like a boutique investment bank, to help you with the complexities and rigor of selling a larger, more complex business.
Now, there are plenty of brokers & advisors who work with businesses between $1-100 million (there are many), but generally speaking, business brokers buy and sell small businesses, while M&A advisor firms and investment banks take on larger deals ranging from tens of millions into the billions.
Business Broker and M&A Advisor Fees
Most business brokers and M&A advisors charge success fees, or commissions, that are based on the value of the transaction they help their clients execute.
Unlike consultants, CPAs, and attorneys who typically charge an hourly rate, brokers and advisors earn a large portion, if not all of their income, in the form of success fee commissions.
A general range of fees based on deal size is as follows:
Business sale under $2 million: 8-12% fees
Sales between $2-5 million: 6-8% fees
Sales between $5-10 million: 5-7% fees
Sales above $10 million: 2-6% fees, with larger deals typically resulting in lower percentages
For larger M&A deals and some small business deals, you may find your advisor requiring a work fee or retainer to cover the initial costs of preparing the business valuation, marketing materials, paperwork, but these fees are typically credited against the ultimate success fee.
How to Get the Most from Your Business Broker
The best business advisors provide services to client clients that are predictable, consistent, and most importantly: Achieve the results that they engage to provide.
When selling a business, we often see our clients asking for:
Business valuation: What is the potential selling price of the business?
Timing: Is now the right time to sell my business?
Process: What is the process to sell my business? How long does it take?
Risks and Rewards: What are the risks of selling my business? What if my employees find out? What if the buyer fails to pay me or if the business fails after they buy it?
These are all logical questions and demands of a business owner looking to sell a business. And these are the exact questions we help our clients answer when it comes time to sell their business.
Book a free business valuation call today!
Top 5 Signs It's Time to Sell Your Business
Owning a business is an incredibly rewarding experience for most entrepreneurs. And after years, decades, even a lifetime of running your prized small business as best as you can, the writings on the wall may be indicating that it is time to consider selling your business.
Top 5 Signs It's Time to Sell Your Business
Owning a business is an incredibly rewarding experience for most entrepreneurs. And after years, decades, even a lifetime of running your prized small business as best as you can, the writings on the wall may be indicating that it is time to consider selling your business.
But is now really the right time to sell your business? Should you wait another 2-3 years? Is the time right to sell it today?
Selling your business doesn't have to be because you have no other choice; you can gracefully bow out before circumstances force you to exit in a dreaded fire sale. The difference between the two recognizes the indications that it's time to exit.
Let’s explore the top 5 signs it’s time to sell your business.
#1 You Are Facing Burnout
When the exhaustion of running the business outweighs your passion, it's time to consider selling your business. It may be because you continuously invested your heart and soul in the company until you feel that you have no more “gas in the tank”, or, you find yourself continuously looking for something new to stimulate your mind.
Although the decision to sell is not always easy, it may be the best move for you and your business in the long run. If you're no longer passionate about the company, the chances are high that you may not be the best person to operate it. Retaining your business at such a point may seem like the safe and logical choice, but what if your business would be best owned and run by a more energized and passionate owner?
Entrepreneurs face burnout at an alarming rate. Sometimes it’s temporary fatigue that you overcome. Other times, burnout is a slow burning feeling that you simply don’t have the energy, focus, or desire to run the business any longer that gets stronger over time.
The truth is, running a business is challenging mentally, emotionally, financially, and physically. And it takes an incredible amount of energy and passion to consistently give 100% of yourself to the same business day in and day out.
Some entrepreneurs can only handle being in business for a period of a few years at a time before they feel burned out. Others take decades to reach the dreaded burnout phase. Regardless of your reasons, if you're experiencing burnout, it could indicate that it's time to sell…before it’s too late.
#2: You Desire a Better Quality of Life
Your business may feel like a child that you have nurtured and fed for years, even decades, of your life. You’ve poured your life savings into it, spent nights and weekends working on it for years, missed your real children’s ball games and recitals to invest time into your business, employees, and customers.
And now, you simply don’t want to continue pouring the same time and energy into your business. And that’s OK!
Whether you have health reasons for selling your business or you are deliberately committing to spending more time with your loved ones, life’s circumstances are a common, and respected, reason for deciding to sell your business.
If you desire more free time, the best way to ensure you spend the next few decades on family time is to sell your business.
Other personal life circumstances that can affect your business include medical conditions, disability, family growth, divorce, or an emergency that requires your time, or your money, to address. Whatever your reasons, these are signs that it’s time to move on from your business.
Many entrepreneurs reach a point where running the business is no longer enjoyable. You could be tired of handling staff issues such as discipline, hiring, firing, or dealing with finances.
As your business grows, some issues may go away, but some get replaced by more minor problems that are still challenging. It starts taking a toll on your physical and mental health, making you desire a stress-free life.
There's no shame in desiring a better quality of life; it's a natural process. Starting a business and then selling it is not an admission of defeat but an excellent way to begin the next step in life and fully monetize your life’s work.
If you find yourself looking forward to not working, looking for flight packages, or browsing travel blogs with an intense desire to have free time, all the time, it’s time to implement an exit strategy.
#3: You Have Staffing Challenges
The COVID-19 pandemic permanently changed the talent acquisition process and strategies. As most businesses struggle to regain their footing, they also have to keep up with these changes and recruit, train, motivate, and retain employees…especially, young employees.
As an entrepreneur, you may already be familiar with hiring and retaining top talent. With the dynamic conditions and unpredictability, it is now more challenging to acquire, train, and keep qualified employees this year, and likely next year as well.
Top candidates are highly sought after and demand higher salaries, more time off, more robust benefits, and unfortunately, many employees don’t want to work as hard as prior generations! This means that the environment for attracting the top talent to run your business is more difficult in 2022 than it EVER has been in the past. This creates a new challenge since you have to impress them enough above your competitors in order to hire them and keep them happy and productive.
If you are approaching retirement age, do you really want to deal with high turnover and training the next generation of your employees, in today’s environment?
If you’re facing such challenges, it may be best to sell your business to a larger entity or more energized individual before the uncanny labor markets and employment environments start to cause your business to suffer, or even fail beyond repair.
#4: Your Industry is Changing
Over the last two decades, technology shifts and advances made multiple industries obsolete. Technology is vital, and required, for most small businesses to maintain their edge and drive growth, customer satisfaction, employee retention, and profits.
If your business is behind in adapting to today’s demand for technology advancement, and the investment of time and capital is beyond your current means, you may consider selling your business to a company with more resources.
A great example is DVDs. There was a time when people paid to purchase DVDs, and such stores were thriving and scaling to accommodate the high numbers (remember Blockbuster Video?).
Video streaming services like Netflix killed the DVD, and businesses in the video and entertainment world had to adapt quickly and catch up for a chance to survive. The few who chose to remain as is end up with businesses no one would buy (hence, Blockbuster Video going bankrupt in 2010).
This shows that no business is truly safe from market changes. Constant innovations affect all industries, some more than others.
If you monitor the changes within your industry and realize you’re struggling to keep up, it’s a sign that you should exit while you can. If you can foresee an upcoming megatrend that could make your business obsolete or irrelevant, it’s best to put your exit plan in motion.
Another aspect to consider is your scalability. Currently, most businesses are no longer able to maintain traditional operational methods. If your business can't scale to accommodate market demands and industry trends, you'll always play catch up and lag behind competitors.
With little or no competing power, your business will become obsolete. As tricky as this reality is to face, you may decide that these changes are worth selling your business to a competitor or younger entrepreneur who can give the business the 10-20 years of hard work it needs to thrive.
#5: You Are Facing Financial Challenges
Managing capital and increasing cash flows is often a challenge for most entrepreneurs. The expected amount, terms, and timing are not always perfect, leading to the accumulation of unmanageable debt.
Such challenges can cause service interruptions or paralyzed business operations. If your business cannot manage expenditures and continue to grow, it may be time to sell.
Investing in marketing activities is an excellent way to ensure your business’s future. However, if you’re consuming capital just to stay afloat, and you are not getting positive returns from marketing and growth initiatives, the future you’re trying to build is not guaranteed.
If your savings are slowly being depleted, you are not seeing the pricing power and positive cash flows you did in the past, and you are starting to dig into your retirement fund to stay afloat, it may be a great time to sell the business.
Is Selling Your Business the Best Move?
One of the most challenging decisions you'll face is deciding to sell your business. It may feel like you're giving up on your life's work, but it could be the best move you'll ever make.
Hopefully, these five signs will give you a new perspective on why you need to sell. It’s best to consult some experts to determine the best terms and the price you deserve for your hard work.
Book a free business valuation call today!
Business Valuation Methods: What is Your Business Worth?
When you explore the sale of your business, whether with a business broker or M&A advisor, or if you choose to sell your own business yourself, you must first determine one critical number before you take the first step: Business Valuation.
When you explore the sale of your business, whether with a business broker or M&A advisor, or if you choose to sell your own business yourself, you must first determine one critical number before you take the first step: Business Valuation.
If you’ve ever wondered, “How much is my business worth?”, “small business valuation methods” or simply “how do you value a small business?”, then you have surely begun doing the appropriate research to start your business sale process.
While business valuation is based on a number of factors, a small business’s value can be boiled down into a rather simple formula that most small businesses can use to estimate their value that we will cover below.
Keep in mind that every business is unique and has dozens of factors that drive the market value, this guide will help you determine a potential valuation range that you can use as a basis for selling your business.
Small Business Valuation Methods
While each business’s actual value is up to the market of buyers to decide, most businesses are valued as a multiple of their annual earnings.
Similarly to how public company stocks are valued at a price to earnings ratio (or P/E ratio), private companies are valued based on their earnings as well, but using a more simple formula.
Small businesses use a similar metric that uses their EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization), or Seller’s Discretionary Earnings (SDE) for a twelve month period.
Depending on when the business is valued, you will typically use the last twelve months (LTM) or Trailing Twelve Months (TTM) of earnings.
Using the TTM earnings number, buyers will multiply that number by a range of 2x to 8x to arrive at a valuation that is reasonable to pay to buy a company.
Small business buyers are usually willing to pay 2-3x, while slightly larger (small businesses) can fetch multiples of 4-5x.
Exceptional businesses with very unique qualities, growth, and profitability may fetch multiples above 5x, with high value assets selling for 8x, 10x, even 12x, depending on the demand for their assets, though quite rare.
And yes, this applies to small, privately held businesses too.
In general, you will find that most small businesses with revenues up to several million dollars and 10-25% profit margins fetch valuations in the 2-4x multiple range.
Calculating EBITDA
EBITDA is a Wall Street calculation of a business’s profits that investors and buyers of all types have become accustomed to using to evaluate the profitability and value of a business.
The purpose of using EBITDA is to “normalize” or isolate the businesses operating income by eliminating the impacts of financing decisions, government taxes, and other accounting treatments to provide a pure indication of the business’s earnings.
This helps investors and buyers compare a business on a more “apples to apples” basis.
It’s also worth noting that in most cases, EBITDA is a higher number than net income - so if you have reached this point in the article and are disappointed in your potential valuation, please read on since your EBITDA is likely higher than your net income.
Also, EBITDA is more relevant to slightly larger businesses where the owner’s salary is critical to the operation of the business, and in theory, the business has established operations and staff that would continue with the business after it is sold. Usually, the owner’s salary is not added back to EBITDA.
Here is formula using example numbers:
Net Income = $500,000.
Interest Expense = $100,000
Income Taxes = $10,000
Depreciation Expense = $200,000
Amortization Expense = $20,000
EBITDA = $830,000 ($500,000 + $100,000 + $10,000 + $200,000 +$20,000)
Calculating Seller’s Discretionary Earnings (SDE)
Seller’s Discretionary Earnings is a similar method of modifying net income that is used for small businesses and banks to determine valuation and funding worthiness.
Where EBITDA includes the actual net income of a business, including deductions for the owner’s salary, Seller’s Discretionary Earnings also adds back all of the owner’s pay, benefits, and personal expenses to EBITDA, potentially further increasing the valuation potential.
This is a more relevant number for a small business so that the buyers get a clear picture of the operating profits of the business without the owner’s pay or personal expenses that will cease to exist once the business is sold.
EBITDA = $100,000.
Owner’s Salary: $100,000
Owner’s Personal Vehicle= $10,000
Owner’s Spouse Salary = $40,000
Owner’s Health Insurance = $15,000
Owner’s Personal Expenses = $5,000
SDE = $170,000 ($100,000 + $10,000 + $40,000 + $15,000 +$5,000
Business Valuation Summary
The valuation methodologies above are the most common and straightforward ways to value small businesses. If you are curious about your business valuation, you can use the general methods above for a rough idea of your business sale price potential.
If you would like a more detailed analysis, book a free valuation call with one of our business brokers today. You have nothing to lose!
