Probably not, and a friend's sale price is one of the least reliable places to get a number. Your business is worth what a qualified buyer will pay and what a lender will finance, which starts with the profit you can prove and a multiple that fits your size, your industry and your trend.
If you already have a price in your head, it's worth asking where it came from. There are three common places, and each one has a problem.
Three common sources, and what's wrong with each
A friend who sold. Maybe a buddy sold his business for a big number. But you don't know his margins, his terms, or how much of that price he was actually paid over time. A headline price can include a seller note paid out over years, or an earnout that only pays if the business hits targets after the sale. Two deals with the same headline price can put very different amounts of cash in the seller's pocket at closing.
Your CPA. Your CPA knows your taxes well, and that knowledge is valuable in a sale. But unless they value businesses for a living, pricing a business for sale is a different job. Tax work looks backward at what you owe. A valuation looks at what a buyer will pay for the earnings going forward, and what a lender will let them borrow to do it.
A rule of thumb online. Maybe you found a formula like revenue times some multiple. The problem is that buyers don't pay for revenue. Two businesses with the same sales can have completely different profits, and profit is what pays back a buyer's loan.
How a buyer actually builds the number
Buyers start with the profit they can verify. For most owner operated businesses, that's seller's discretionary earnings, or SDE: pretax profit with the owner's pay, interest, depreciation, amortization and documented personal or one time costs added back. Verification matters here. According to BizBuySell, SBA lenders typically underwrite from tax returns, so profit that only exists in conversation tends to fall out of the price.
Next comes a multiple. It moves with the size of the business, the industry, and the trend. A business that is growing, with a team that can run it, earns a better multiple than one that is shrinking or depends entirely on its owner.
Finally, the lender weighs in. Most buyers plan to use an SBA loan, and the lender has to be comfortable that the business's cash flow covers the loan payments with a cushion. A price the bank won't finance is a price most buyers can't pay.
Getting a number you can defend
If your number didn't come from verified profit and a multiple that fits your business, it's really just a guess. A guess is fine for daydreaming. It is a problem when you turn down a good offer because it doesn't match a number you heard at a barbecue, or when you list too high and the business sits.
The better path is a value range you can explain line by line, built from your own documented earnings. If you want to start there, request a confidential business valuation.
Ready to talk it through? Talk with me about selling. No cost, no obligation.
Read the transcript
Your business isn't worth what your buddy sold his for.
If you've already got a price in your head, it's worth asking where the price came from. There are three common places, and each one has a key problem.
Maybe your friend sold his business for a big number, but you don't know his margins, his terms, or how much of that price he got paid over time.
Maybe your CPA gave you a number. They know your taxes well, but unless they value businesses for a living, pricing a business for sale is a very different job.
Or maybe you found a rule of thumb online, like revenue times some multiple. The problem is buyers don't pay for revenue. They pay for profit they can verify.
So here's the truth. Your business is worth what a qualified buyer will pay and what a lender will finance. It starts with the profit you can prove, and then you apply a multiple that fits your size, your industry, and your trend. If your numbers didn't come from that, it's really just a guess.
So where did your number come from? Tell me in the comments.
