One Tweak That Can (Instantly) Add Millions To The Value Of Your Business

If you’re trying to figure out what your business might be worth, it’s helpful to consider what acquirers are paying for companies like yours these days.

A little internet research will probably reveal that a business like yours trades for a multiple of your pre-tax profit, which is the Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation, and Amortization (EBITDA) for a slightly larger business.

Obsessing Over Your Multiple

This multiple can transfix entrepreneurs. Many owners want to know their multiple and how to jack it up. After all, if your business has $500,000 in profit and it trades for four times the profit, it’s worth $2 million; if the same business trades for eight times the profit, it’s worth $4 million.

Obviously, your multiple will have a profound impact on the haul you take from the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying.

How Profitability Is Open To Interpretation

Most entrepreneurs think of profit as an objective measure calculated by an accountant, but profit is far from objective when it comes to selling your business. Your profit will go through a set of “adjustments” designed to estimate your business's profitability under a new owner.

This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.

Let’s take a simple example to illustrate. Imagine you run a company with $3 million in revenue and pay yourself a salary of $200,000 yearly. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year. You could safely make the case to an acquirer that your business would generate an extra $100,000 in profit under their ownership. If they pay you five times the profit for your business, that adjustment can potentially earn you an extra $500,000.

You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business. This is more art than science; you must be prepared to defend your case for each adjustment. You must make a good case for how profitable your business will be in the hands of an acquirer.