Justifying Business Asking Price: SDE, Earnings Multiple, Third Party

In part one of this two-part blog series, we went over some of the initial themes to consider as you go about justifying your business asking price during a potential sale situation. Once you've set a price and listed your company on the market, many of the initial inquiries you'll get from prospective buyers will involve you justifying the price you've set in various ways.

At Utah Business Consultants, we're here to help with a wide variety of business sale services, from business listings to exit planning solutions, business valuations and much more. Today's part two of our series will discuss some of the other key ways you can go about justifying and proving your asking price when selling a business.

justifying business asking priceStatement of Seller's Discretionary Earnings

Abbreviated SDE, this is the most common method for gauging the value of a business and one that many prospective buyers will use to evaluate an offer. It's derived by taking out all of your operating expenses from your total revenue, leaving you with just your net income. This SDE then works as a baseline for calculating what kind of value the buyer can expect from the business.

Estimate Earnings Multiple

Another major factor in determining your business's value is the estimate earnings multiple (EEM). This is a measure of how much buyers are willing to pay for your company based on the future potential cash flow. By multiplying this EEM with your SDE, you can get an accurate measurement of what kind of value the buyer should expect from their purchase.

For most small or medium-sized businesses, earnings multiples for sales will be between 1-4. This can be impacted by a number of factors, from the company's recent performance to how simple the transition is expected to be. Another key element will be recurring revenue, which is often seen as a sign of stability and an important factor in negotiating the final sale price.

Confirming Value Via Outside Parties

Finally, one of the strongest and most persuasive methods for justifying your sales price is to have it confirmed by an outside party. This can come in the form of a third-party valuation, which will provide a more accurate appraisal and credibly demonstrate that your asking price is reasonable. Having a professional business valuator on hand can also be beneficial for buyers who are looking for financial assurance before making a commitment.

Ultimately, it's important to have a strong understanding of the current market and pricing trends in order to accurately justify your asking price. This can be challenging for many sellers, especially those who are new to the process or don't have access to up-to-date information. By following the steps outlined above and seeking out professional assistance with the sale of your business, you can help ensure that you get a fair price for your company.

At Utah Business Consultants, we're here to help guide you through the process of selling your business as easily and efficiently as possible. Contact us today to learn more about our services or to set up an appointment!

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