The oversimplified formula is 3X owner’s annual “take.” If you’ve ever had a formal business valuation and then tried to s
ell your business, you realize the business valuation is really only an estimate and indication of what a buyer might pay if all assumptions line up.
What many sellers forget is the multiple risks a buyer takes on when they take over a business – will the customers stay, will the business run well without the old owner, will key employees leave, etc. These are all significant risks that need to be “insured.” Take a guess, who insures that risk? Hint: It’s NOT the buyer. It’s you.
The “riskier” the deal, the more significant the discount you take. For most businesses, the simple valuation estimate is 3X your total economic value annually. That’s your salary, perks, dividends, and any other value you get from ownership.
Though you can’t change buyer psychology, you CAN change how attractive your business is and command a premium price.
