Accurately Valuing a Business

Since 2017, Matthew Brunstrum has served as an advisor for Sun Acquisitions, LLC, in Chicago, Illinois. In this capacity, Matthew Brunstrum assists clients with the completion of mergers and acquisitions in the lower middle market. This involves completing everything from deal sourcing and marketing to business valuations.

Whether you’re buying or selling a business, conducting a valuation is an essential part of the process. There are several ways you can value a business. The crudest method entails looking at the revenue streams of the company and multiplying the different values. If you have a company that brings in $150,000 in revenue a year, for example, and other businesses in the same market usually sell for about twice their sales, then the company may be valued at around $300,000.

However, revenue does not equal profit, and companies could be bringing in $150,000 in revenue while having a profit of only $50,000. Because of this, it’s usually best to look at a company’s earnings when completing a valuation. This does require some estimation since you must predict what a company’s earnings will be over the next several years. For instance, just because a business has made $10,000 in profit for the current year doesn’t mean that the company will continue making that much over the next five years.

To get the most accurate valuation possible, many professionals rely on a company’s seller’s discretionary earnings (SDE). This calculation includes non-cash expenses and expenses reported to the IRS. In addition to this, SDE calculates the owner’s salary and benefits. You multiply this final number by different multiples based on the location, size, and assets of the business as well as the volatility of the market in which it operates.