“You're gonna put things through your come through the business that aren't necessarily an absolute have to so if somebody else were to pick up your company and start running it”
Welcome to a brand new episode of the Cash Flow CFO Podcast. Join me on this solo episode as I discuss a crucial step for business owners: determining how much your business is currently worth. If you're planning to sell your business, understanding its value is paramount. To do that, you'll need to calculate two essential numbers: cash flow earnings and the industry multiple.
Join us to learn the whole story!
“ If you're a professionally managed company, and you're a professionally managed company, if your business you can take a month vacation and your business still grows and runs without you, you've got management in place, you've got all the pillars of your business are staffed and running the way that they're supposed to. “
Step 1: Calculating Cash Flow Earnings
First, let's focus on calculating your cash flow earnings, which will help you understand what your business is truly worth. There are two methods to consider:
SDE (Seller Discretionary Earnings): This method is suitable if you're an owner-operator heavily involved in the day-to-day operations of your business.
EBITA (Earnings Before Interest, Taxes, Depreciation, and Amortization): If your business is professionally managed, meaning it can operate smoothly without your direct involvement, this method is more appropriate.
For the majority of owner-operators, SDE is the way to go. To calculate your SDE, start with your net income from your profit and loss statement. Then, identify and add back any expenses that aren't essential for the business to operate. These could include personal expenses, non-critical memberships, or even family members' salaries if they don't contribute significantly to the business.
For instance, if your net income is $125,000 and you've identified $124,000 in add-backs, your total cash flow earnings become $249,000. This represents what the business would earn in someone else's hands.
Step 2: Determining the Industry Multiple
The next crucial component in valuing your business is the industry multiple. This figure varies based on your specific industry and the financial performance of businesses similar to yours that have been sold. Think of it like comparing house prices in real estate—the comparable sales in your neighborhood help set the price.
Calculating Your Business's Value
Once you have your cash flow earnings and the industry multiple, it's time to determine your business's current value. Simply multiply your cash flow earnings
Want to get in touch with Andrea Jenson?
The Cash Flow CFO Podcast
Hey everybody, welcome to The Cash Flow CFO podcast, the show that explores the financial side of running a business for people who want to maximize profitability and scale with confidence.
If you want to make smart financial decisions based on data and put more of your hard-earned profits into your pocket, this is the podcast for you.
The Cash Flow CFO Podcast is brought to you by The Cash Flow CFO. Did you know that, on average, business owners have up to 84% of their personal net worth tied up in their business? Our team of virtual CPAs and CFOs, as well as accounting and bookkeeping experts empower business owners just like you to make big leaps that help them maximize profitability and scale with confidence.
Visit thecashflowcfo.com for more information, and thank you for listening.