How to value a small business
Here’s a specific example of valuing a restaurant business using SDE and a multiple:
Restaurant Financial Information:
- Net Income (from tax return): $150,000
- Interest Expense: $15,000
- Depreciation Expense: $20,000
- Amortization Expense: $5,000
- Owner’s Salary: $75,000
- Owner’s Benefits: $10,000
- Discretionary Expenses: $5,000
Calculating SDE:
- Start with Net Income: $150,000
- Add back Interest, Depreciation, and Amortization: $15,000 + $20,000 + $5,000 = $40,000
- SDE (before owner’s compensation adjustment): $150,000 + $40,000 = $190,000
- Deduct Owner’s Salary and Benefits: $190,000 – $75,000 – $10,000 = $105,000
- Subtract Discretionary Expenses: $105,000 – $5,000 = $100,000 (SDE)
Applying a Multiple:
- Typical SDE multiples for restaurants range from 2.14x to 2.96x.
- Let’s assume a multiple of 2.5x for this example.
Valuation Calculation:
- SDE: $100,000
- Multiple: 2.5x
- Estimated Business Value: $100,000 x 2.5 = $250,000
Interpretation:
- Based on this calculation, the estimated value of the restaurant business using the SDE method and a multiple of 2.5x is $250,000.
Additional Considerations:
- The actual multiple used can vary based on factors such as:
- Location
- Type of restaurant (fast-casual, fine dining, etc.)
- Financial performance
- Growth potential
- Brand reputation
- Market conditions
- It’s essential to consult with a professional business valuation expert for a comprehensive and accurate assessment, as they can consider these factors and provide tailored guidance.