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You’ve seen the news stories about professionals and companies being bought out by larger corporations. What can you expect if your company is in a competitive industry? The average cost of buying an existing business varies greatly depending on factors like size, location, industry and age.
Buying a business is an important decision that can have a huge impact on your life. You will want to be prepared and understand the average cost of buying a business by industry. Read more in detail here: buying an existing business checklist.
We’ll go through the usual expenses of purchasing a company, as well as a breakdown of pricing by industry, and give you a quick overview of how to estimate the price of a small business based on its profits, in this post. We’ll also help you create a budget so you can figure out what sorts of companies you can afford to buy.
See our comprehensive guide to valuing a company for a more extensive explanation, including a step-by-step example, on how to assess the value of a small firm.
Costs of Purchasing a Business by Industry
If your investment budget is less than $250,000,
- $80,000 – Beauty Salons/Barber Shops
- $128,500 for landscaping and yard services
- $128,750 – Restaurants
- $130,000 Other Eating and Drinking Places
- $160,000 – Apparel and Accessory Stores
- Recreation and amusement $165,000
- $175,000 – Convenience Stores
- $195,000 for bars and taverns
- $199,000 for dry cleaning and laundry services
- $240,000 in auto repair, parts, and services
If You Have $250,000 or More to Invest
- $252,500 – Gasoline Service Stations
- $270,000 – Liquor Stores
- $270,000 in supermarkets
- $275,000 for educational services
- $325,000 for health, medical, and dental services
- $356,000 – Construction-Special Trades
- $431,500 in durable goods
- $542,750 – Hotel and Other Lodging Places
- $725,000 Fabricated Metal Products
- Wooden Products and Lumber – $1,175,000 – $1,175,000 – $1,175,000
It’s never too early to start planning for funding! In fact, you should start thinking about how you’ll pay for a company well before you meet with sellers. A buyer who has the capacity to move ahead swiftly has an edge, much like when purchasing a property. Begin by looking up your credit score. You can check out your credit score for free here if you don’t already know it.
Even if your credit score is excellent, most lenders will need you to put down at least 30% of the buying price. Using cash from your retirement account is a common choice. Using a ROBS, this may be done without incurring an IRS penalty. We suggest that you read. Is a ROBS the correct choice for you?
When buying a business, this is the average price you’ll pay.
You may be interested in more broad facts if you haven’t narrowed down the industry in which you intend to acquire a firm. Here is the most recent information on median pricing when purchasing a small company. This information is sourced from BizBuySell, a major business-for-sale website with thousands of small companies for sale.
- The median Price of Sale for firms sold in the third quarter of 2015 was $185,000
- The Revenue in the Middle for firms sold in the third quarter of 2015 was $438,000 dollars.
- $100,000 = Median Cash Flow for Businesses Sold in 2015’s Third Quarter
These are median numbers, which means they represent the straight middle point of each of the data sets. For example, if one firm sold for $100,000, another for $250,000, and still another for $750,000, the median would be $250,000, since the data set had the same number of values on both sides. Although median values aren’t as exact as averages, they can give you a reasonable idea of what you may anticipate to spend for a company.
Sale Price Median
The Sale Price Median of a business has been in the range of $150,000 to $200,000 for the last 4 years. It slipped slightly from 2014 ($189,000) to 2015 ($185,000). According to BizBuySell, this is probably because buyers paid less due to the slightly higher costs of running a business in 2015. However, overall, buyers in today’s market are confident about the ability to earn a good return on their investment, so they are paying close to the seller’s asking price of the business. The average asking price of a small business in 2015 was $200,000.
- The median asking price for companies sold in the third quarter of 2015 was $200,000.
- In the third quarter of 2014, the median selling price was $185,000 dollars.
Revenue in the Middle
Over the last four years, Revenue in the Middle for sold small businesses increased from around $375,000 in the third quarter of 2011 to $438,000 in the third quarter of 2015. This indicates that people are buying bigger businesses now than in the recent past.
- $375,000 = Revenue in the Middle for Sold Small Businesses in the 3rd Quarter of 2011
- $438,000 = Revenue in the Middle for Sold Small Businesses in the 3rd Quarter of 2015
(Seller’s Discretionary Earnings) Median Cash Flow
The “cash flow” statistic in BizBuySell’s Insight reports and listings refers to a company’s net income after subtracting the owner’s salary and some other costs (complete list of inclusions here). This statistic is also known as a company’s Seller’s Discretionary Earnings (SDE).
This statistic is critical because it is the only one that accurately indicates what you may anticipate to earn as a company owner. It’s also significant since it’s the primary metric used to determine the worth of a company (explained further below and in this article).
Over the previous three to four years, the median cash flow of sold small enterprises has been relatively consistent in the $80,000 to $100,000 range.
- In the third quarter of 2011, the median cash flow for sold small businesses was $80,000.
- In the third quarter of 2015, the median cash flow for sold small businesses was $100,000.
How to Determine Specific Business Pricing Using the Seller’s Discretionary Earnings
The broad sales data provided above are excellent for providing a rough approximation. When it comes to purchasing a company, however, the fact is that individuals pay either less or significantly more than the average. You must utilize Seller’s Discretionary Earnings to acquire a more precise assessment of a company’ worth (SDE). Once you have SDE, you may apply the formula below to assess the worth of a company:
SDE multiplied by Industry Multiplier + Real Estate + Accounts/Receivables + Cash on hand + Any additional assets not included in the SDE multiplier – Business Liabilities
= Estimated Business Value
Here’s how it works in detail:
- Determine the SDE
SDE gives you a good estimate of a business’ true revenue potential. You can Determine the SDE by taking the net income of a business, as reported on its tax return, and adding back certain expenses. You should add back the owner’s salary, expenses that are aren’t essential to running the business, and one-time expenses that are unlikely to recur.
According to Wayne Quilitz, President of business brokerage firm Murphy Valuation Services, here are some examples of things that would be added back into the net income reported on the business’ tax return to Determine the SDE:
- Salary and benefits for the owner
- On the payroll are family members.
- Depreciation and amortization are non-cash costs.
- Business golf trips, for example, are leisure activities.
- Donations to charity
- Any personal costs that were reported as expenses on the company tax return, such as the purchase of a personal automobile.
- Business travel that isn’t necessary for the company’s operations.
- One-time costs that are unlikely to repeat once the company is sold, such as a litigation settlement.
- Determine the appropriate SDE multiplier.
Businesses usually sell for between 1 and 3 times their SDE. The SDE multiple or multiplier varies depending on industry and regional trends (market risk), firm size, tangible and intangible assets, independence from the owner (owner risk), and many other factors. Because so many variables influence which multiple you should employ, this is perhaps the most subjective component of valuing a firm.
Looking at BizBuySell data might help you figure out an estimated SDE multiple. Multiples are listed per industry. The phrase “cash flow multiple” is used by BizBuySell, however it is the same as SDE multiple. In 2015, the average SDE multiple across all sold enterprises was 2.28.
Average company value = SDE x 2.28
- To obtain a company value, add additional business assets.
You must then add assets that were not included in the SDE multiplier as a last step. To establish a firm’ ultimate value, factors including real estate, accounts receivables, and cash on hand must be added, while liabilities (such as debt and interest) must be deducted.
If you don’t want to deal with the arithmetic, you may employ a professional appraiser instead. They will value your company for you and charge between $2,000 and $3,000. Keep in mind that, although a professional assessment might be more accurate, it also limits the buyer’s and seller’s bargaining options.
How Does Industry Affect a Company’s Value?
Depending on the industry, the selling price of a firm might vary greatly. That is why, when purchasing a firm and determining the price, it is also important to consider industry-specific facts.
We chose restaurants because they account for almost a quarter of all small company sales (24 percent), easily making them the most profitable small business category (buy a significant margin).
Dry cleaners/laundromats, bars/taverns, and convenience shops are also popular small enterprises.
We added data from dry cleaners/laundromats since they are the third most popular business category and are extremely different from restaurants in nature, making them a good comparison.
The following is the report’s sales data for the restaurant and dry cleaning/laundry industries:
There are a few noteworthy discrepancies that ought to be discussed.
Price of Sale
One of the first inferences to be drawn from the data is that restaurants sell for around $70,000 less than dry cleaning/laundry service firms on average. So, if you’re uncertain between the two and just want the cheapest choice, the difference in average price can lead you to buy a restaurant.
Revenue & Cash Flow
The revenue disparity between median restaurant revenue and median dry cleaning revenue is enormous, with restaurants bringing in about twice as much as dry cleaners.
Restaurants, on the other hand, have higher operational expenses than laundromats. Employee salary, equipment upkeep, and utilities are the most significant expenses for laundromats (water, electricity, etc). Restaurants, on average, have more staff and have higher recurring expenditures (purchase of food, drink, etc.). As a consequence, despite the fact that restaurants generate far more income, both businesses have essentially identical cash flow. This would explain why the SDE multiples of the two businesses are so different: 1.89 (restaurants) vs. 2.69 (dry cleaning/laundry).
In addition, dry cleaners and laundromats can count on a steady stream of consumers. There is little motivation for a consumer to transfer laundromats or cease going to a laundromat unless they purchase a washer and dryer. They’re ready to go if the environment is safe and the equipment works.
Market Risk & Owner Risk
The value of a company is influenced by industry and regional trends. “Market risk” is a term used to describe this. When it comes to client retention, a restaurant is a considerably more unpredictable sector. On a number of fronts, they are continuously competing with rival eateries (price, food quality, service). If a consumer experiences poor service or meal quality once, they may never return.
To put it another way, the transferability and long-term viability of a restaurant company is much less certain than that of a dry cleaner or laundry (there are exceptions of course).
The degree to which a firm is independent of its existing owner is referred to as owner risk. Transferring ownership of a laundromat is quite simple and has no influence on the client base. A restaurant, on the other hand, is often reliant on its proprietor. People may visit the restaurant because it is owned by a local resident or because a particular chef works there. They may quit coming to the restaurant if this changes.
This is why, when determining how much you may anticipate to spend for a certain firm, looking at sector specific multipliers is critical.
Are you looking to purchase a business? To obtain our FREE guide on how to buy a business, click here.
Conclusion
The aim of all of this is to show how statistics (averages, medians, and multipliers) may help you estimate how much a company will cost when you acquire it. These may also help you figure out why certain firms are selling for more or less than others.
You should be able to identify a fairly good idea of how much you may anticipate to pay when purchasing a firm using industry specific multipliers. As you can see, purchasing a company may be costly.
The “buying a small business for dummies” is an informative text that describes the average cost of buying a business by industry.
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