As an experienced business broker, we’ve sold over 1K businesses and constantly refine how we value them to reflect the industry and what buyers/investors are after. Ultimately, our valuations follow a simple formula.
Online Business Valuation Formula
[6-12 Months’ Average Net Profit] x Multiple (Typically 20–60+)
SDE vs. EBITDA
There are many ways to get the present value of your business, but most of which will be valued in one of two ways.
Seller discretionary earnings (SDE) is the most common of these business valuation methods, particularly for small businesses. Pretty much any online business on our marketplace, and most other brokers’ marketplaces, will use this method.
SDE is calculated based on net earnings before tax. This means the cost of goods sold and necessary operating expenses will be subtracted from the revenue.
Any owner salary will be added back on so that you get a true understanding of the business’s earnings. Discretionary earnings, which are the costs that aren’t necessary to operate the business, will also get added back. These could be real estate that’s not business linked, life insurance, or even credit card charges that the new owner wouldn’t incur.
This method works well because it shows how the business performs on a pure cash flow basis. It takes the current owner out of the equation and makes it easier to see how much the business is making should anyone ever take over. This is why SDE is sometimes referred to as seller discretionary cash flow.
SDE is the most common valuation method and most suitable for businesses up to around $5 million in annual revenue.
When businesses earn over this amount, they usually have a more complex structure in terms of a hierarchy of staff, as well as multiple stakeholders. This is where the EBITDA model comes in, which stands for earnings before interest, tax, depreciation, and amortization.
EBITDA uses a similar methodology to SDE; however, it takes into account that more complex businesses are not owner-operated. Large businesses will often have managers and staff on the payroll.
Therefore, EBITDA adds back any excessive owner salary, as compared to a manager’s salary. This helps investors compare the acquisition target to similar businesses across the market.
Larger businesses tend not to have a single business owner, but, instead are acquired by private funding groups where no one person is earning all the profit.
It should be noted that determining the value of a business is nuanced. If you’re unsure about your market value, we have an exit planning team that can discuss your options in much more detail and provide you with a professional and accurate valuation.
How to Use Our Online Business Valuation Calculator
Filling out the valuation tool shouldn’t take more than a minute or two.
What it asks you will depend on your main monetization. There are a few things that you will need to know to input the correct information.
It can be helpful to have the following information to hand:
- The date the business was created
- Average monthly gross revenue and expenses
- Average monthly unique visitors
- How many email subscribers you have (if any)
- Number of social media followers (if any)
- Plus, more specific information for some businesses like number of products, downloads, revenue models, etc.
Using this information, we are able to instantly value your business.
A valuation is not necessarily the listing price or sale price you’d get if you sell on our marketplace since there are other factors our teams must consider for our pool of potential buyers.
Why is a Website Valuation Important?
It’s perfectly acceptable to get a valuation for your business without wanting to sell it.
A better understanding of how a business is valued can help you to improve the running of your business. But you might be surprised by how much your business is worth. Online businesses have become increasingly desirable and there are buyers out there willing to pay good money to get their hands on them.
What could you do with the money?
There are many reasons why people decide to sell. Maybe you need startup capital for another investment or you want to travel around the world. Getting a valuation allows you to see how much money you can expect to get.
Many people might not even realize they have a sellable asset.
So why not spend a few minutes filling out our valuation tool? The figure people have in their head is sometimes different from the reality.
This is an objective valuation that’s backed by years of marketplace experience. Knowing how much your business is worth and the valuation methods used will be valuable to you in more ways than one.