Further to David C. Baker's answer, there are databases of business sales with reference to selling price as a percentage of sale and as a multiple of EBITDA and Seller's Discretionary Earnings. (SDE=EBITDA+an owner/manager salary)

With small companies that generate a profit under $500K of EBITDA, it is critical to properly normalize the cash flow, the company can then be compared to other similar companies that have been sold.

I have dealt with several companies in the IT/SaaS space and what I've learned is that they aren't in touch with the reality of selling small business cash flows. Typically a service company with little in capital assets is going to sell for between 1.5 and 2.8 times discretionary cash flow.

What most IT entrepreneurs are looking for is the lofty acquisition multiples that make the headlines. The reality of selling a small business is that a buyer needs to be able to make a living, get a return on his investment and service his debt based on the cash flow that already exists.

Put yourself in the potential buyer's shoes and see what you could afford to pay and still achieve those requirements.

Answered 5 years ago

Unlock Startups Unlimited

Access 20,000+ Startup Experts, 650+ masterclass videos, 1,000+ in-depth guides, and all the software tools you need to launch and grow quickly.

Already a member? Sign in

Copyright © 2020 LLC. All rights reserved.