Determining Your Company's Value: Multiples and Rules of Thumb discusses using multiples such as EBITDA or seller's discretionary earnings to determine a starting point for determining the value of your company:
While there are many factors that help determine an appropriate asking price including competitive advantages, opportunities for growth and historic financial performance multiples and rules of thumb can be a good place to start. Several resources are available for obtaining data on pricing businesses for sale, including Business Valuation Resources and BizBuySell.com. A business broker, intermediary or transaction adviser will have access to a number of resources for small-business deal flow data, as well.
Business Brokerage Press publishes an annual guide to pricing small businesses for sale in both a print and online version. Here are some multiples and rules of thumb for a handful of businesses from the latest version:
Manufacturing (annual sales of $1 million to $5 million): three to four times S.D.E. plus inventory.
Retail auto parts: 40 percent of annual sales plus inventory.
Commercial printers (annual sales under $2 million): two and a half to three times recast Ebitda.
Retail apparel: one and a half times S.D.E. plus inventory.
Wind farms: 10 times Ebitda.
Some industries have their own rules of thumb. For example, an authorized reseller of wireless phones and service is sometimes valued at 30 times monthly residuals. While there is no such thing as a "comp" (comparable) when it comes to selling a small business, looking at multiples for similar businesses in the same industry and preferably in a similar geographic area or market can be the next best thing.
One of the keys to a successful sale is to have a clear understanding of how buyers will value your business, whether it's an individual or a strategic acquirer. More often than not, that value will come down to a multiple of the business's earnings.
You may also find this Estimated Business Valuation Resource useful.
While these resources will give you a good starting point, involving a business valuation expert early in the process will help you maximize your potential after-tax return.
It is important to make sure that your valuation expert has relevant and significant ESOP experience to help you navigate through the ESOP-specific valuation issues.
It is also important to make sure that your appraiser is independent, both in fact and appearance, in order to satisfy the independent appraiser requirements of IRC Section 401(a)(28)(C) - Qualified pension, profit-sharing, and stock bonus plans - Requirements for qualification - Additional requirements relating to employee stock ownership plans. If your appraiser is also providing any other significant services, including TPA recordkeeping services, plan document or other legal services, fiduciary services, or financial, tax, or assurance services, then you should revisit your arrangement to make sure you are still complying with the independent appraiser requirements:
(28) Additional requirements relating to employee stock ownership plans.
(C) Use of independent appraiser. A plan meets the requirements of this subparagraph if all valuations of employer securities which are not readily tradable on an established securities market with respect to activities carried on by the plan are by an independent appraiser. For purposes of the preceding sentence, the term "independent appraiser" means any appraiser meeting requirements similar to the requirements of the regulations prescribed under section 170 (a)(1).