You’ve spent years, maybe even decades, of your life building a successful business, and you’re almost at the finish line. In just a few short years, you will either be ready to sell for maximum value or transfer the business along to someone else. Knowing methods for small business valuation, and how much money you will need for retirement, will help you plan and prepare for your exit strategy and beyond.

Unless you make a habit of building and selling small businesses, this is most likely a new and possibly overwhelming situation. You are expecting to receive a financial windfall, and the prospect of managing such a sizable sum, not to mention the unknown tax liabilities, may have you feeling uncomfortable. But don’t worry, you’re not alone. As a small business financial advisor, we help many small business owners develop a retirement strategy that includes the sale of a business.

Valuation Methods for Your Small Business

Unfortunately, there is no one standardized method for valuing your small business. The approach that you take will vary depending on your situation, and there is usually a certain amount of guesswork involved. At a baseline, there are three primary approaches to valuing a small business: asset-driven, income-based, and market comparison.

  • Asset-driven: This approach looks at your current assets — such as real estate or equipment — minus any liabilities like debt or accounts payable. This method will give you an estimated value based on what the assets are worth in their current condition, so be sure to account for depreciation when applicable.
  • Income-based: In addition to what you own, it is beneficial to examine how much money is coming in from sales and other sources. Calculations for newer businesses should account for fluctuations in future earnings, while more established businesses can rely on historical earnings as an indicator of future revenue.
  • Market comparison: This approach compares recent acquisitions involving companies of a similar size, location, and industry to yours. Since this information is not always publicly available, finding exact amounts may be difficult. If you cannot find sale prices on your own, a small business financial advisor or business broker may be able to help.

Additional Methods

A typical shorthand valuation method for a small business is 1x to 5x Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) or Sellers Discretionary Earnings (SDE) depending on how involved the owner is within the business and what industry they serve. You can see some examples of potential multiples by industry here. However, this is only a rule of thumb. The approaches above should provide you with a more solid understanding of how much your small business could be worth; however, there are additional, more complex, calculations that you can run to gain a more thorough picture. These calculations involve hard data as well as informed estimates, so it is recommended that you meet with a small business financial advisor to get the clearest picture.

For more information on selling a business, we recommend downloading our whitepaper: A Financial Advisor’s Guide to Selling a Business.

Growing Your Wealth After the Sale

The value of your small business should continue to benefit you and your family even after selling it, but investing a large sum of money from the sale of a business is not for the faint of heart. Knowing how to invest a lump sum of money takes experience, patience, and research. A strategy for diversifying risk while capturing upside requires a sound strategy and depends on your risk tolerance. And nothing comes without risk. Even putting all your money in a savings account has risk since the FDIC only insures $250,000 per person in deposits. Additionally, inflation paired with low interest eats into the value of money kept in savings accounts. At Morgan Rosel Wealth Management, we work with you to understand your goals and risk tolerance to develop a lump sum investment strategy that works towards achieving your objectives.

You can only sell a business once, so you need to be confident that you aren’t leaving anything on the table and have a strategy for investing the lump sum. At Morgan Rosel Wealth Management, we have experience working with business owners and we understand your situation. Our partners have even sold businesses of their own. Contact us today to learn how Morgan Rosel Wealth Management can help take the stress and uncertainty out of selling a business. 

This commentary reflects the personal opinions, viewpoints and analyses of the MorganRosel Wealth Management, LLC (“MRWM”) employees and guests providing such comments, and should not be regarded as a description of advisory services provided by MRWM or performance returns of any MRWM Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. MRWM manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. MRWM may recommend the services of a third-party attorney, accountant, tax professional, insurance agent, or other specialist to clients. MRWM is not compensated for these referrals.