The Two Yardsticks
Buyers boil a company down to one figure for yearly earnings, then decide how many years of it they will pay for. Which figure they use depends mostly on size.
Seller's discretionary earnings
For most companies that sell for under about $2 million, the measure is SDE. It is the total one working owner could take out in a year: net profit, plus your salary, plus the perks and benefits the company pays for you.
EBITDA
Once a company is large enough that a paid manager runs it and the owner has stepped back, buyers switch to EBITDA. Here every role, including yours, is costed at a fair market salary first. What's left is the cash a hands off owner would keep.
Recasting Your Books
Your tax returns were built to keep taxes low, which is sensible. A buyer needs to see what the company really earns. That means recasting: adjusting the profit and loss statement so it shows normal, ongoing cash flow.
Adjustments, called addbacks, are fair when they are real and won't repeat for a new owner:
- A one time legal bill or a move to a new building
- Your personal vehicle or insurance run through the company
- A family member on payroll who does little work
- Interest on loans the buyer won't assume
Some things owners hope to add back are not addbacks. Money from selling a truck, a bank loan landing in the account or your distributions are not operating cash flow. A buyer's accountant will find each one in diligence, and trust drops fast when they do.
The Multiple
Once earnings are agreed, they get multiplied. Many established companies trade at roughly two to three times their yearly cash flow. Larger companies with management in place can go higher.
Multiples barely move from one year to the next. Owners who wait a year for a better market usually find the same range when they come back. What changes your number is your own trend, so steady growth beats a sudden spike the year before you sell.
What Pulls the Price Down
Buyers discount for risk. The most common ones we hear about:
- Customer concentration. When the top one to three customers bring in more than about 15 to 20% of revenue, buyers often take that share off the price or pass.
- Owner dependence. If clients call you, not the company, the buyer is paying for relationships that may walk out with you.
- Cash that never hit the books. Income you did not report can't be counted. Saving tax this way often costs two or three times as much in lost sale price.
- A below market lease. If you rent from yourself cheaply, buyers price the company at market rent anyway.
What Pushes It Up
The companies that sell near the top of the range share a few traits: people, profit and process.
A team that runs the day without you, profit shown on returns for several years, and written ways of doing the work. Add recurring revenue, a wide customer base and a clean lease, and buyers compete.
Real Estate Is Valued Separately
If your company owns its building, the property is valued on its own terms, using its rental income and a cap rate.
You might sell both together, sell the company and stay on as landlord, or sell the building to an investor. The broker can walk through each path with you.
Getting Your Own Number
An online calculator can't recast your books. A broker who sells companies in Georgia can, and will tell you plainly where you land. See how the selling process runs after that, or read about buyers using SBA loans.
When you are ready, send the short form or call (404) 555-0139. Our Georgia tax and filings guides cover what comes at closing.