Monthly Newsletter.
March 2026.
This is our first of what we hope to be a series of informative and helpful newsletters to small business owners. We aim to provide insightful and meaningful perspectives for anyone who is currently a business owner and considering an eventual exit plan or those looking to buy a business one day. We will make sure to only send these out on an occasional basis (once per month or less) so that we can keep a promise to not flood your inbox. That said, if you find these insights and perspectives to be not at all applicable to your business or your career, please feel free to unsubscribe at any time.
For most small business owners, it is likely that their greatest asset is not their home or their investments, but rather their business itself. Yet if you asked most business owners, what is your business worth, you likely either get an honest, “I’m not really sure” or an answer (often inflated) that when probed is based on hearsay and limited factual evidence and analysis to support the valuation.
As experienced and ethical business brokers, we also unfortunately all to often see businesses being overvalued and listed by other brokers at unrealistic asking prices. While there are many ethical and skilled professionals in our profession, we are also aware of brokers who, either unscrupulously or unwittingly, attempt to attract a client on their ability to sell a business a synthetically elevated valuation rates to obtain the listing. The net impact of these actions is typically to the detriment of the seller. Not only do they waste time not receiving offers for their business, but worse, they are at significant risk of losing highly-qualified potential buyers who, having determined that the asking price is inflated, do not return to consider the business if after the price as later been reduced to more normative levels. Undervaluing a business, of course, is also not desirable as it leaves money on the table. A savvy and skilled broker needs to know what elements can be defended and factually supported to justify a strong, but realistic asking price for their client’s business.
A key piece of this pricing to understanding multiples and what is appropriate, and a key to this is to first understand the difference between EBITDA and SDE (seller discretionary income). Both of these metrics are measures to represent the cash flow benefits of a business. The key difference is whether the business cash flow need to be reduced to pay the salary of a CEO (EBITDA) or if the CEO of the business is the current owner and will likely continue to be the owner post sale (SDE). The former case, using EBITDA, is typically more relevant in much larger companies, often with 8-figure revenues or more. The later, using SDE, is typically more appropriate in smaller, privately run businesses. Because EBITDA includes the expenses of paying a CEO, its cash flow will, by definition, be lower than the SDE calculation for the same company. As a result, EBITDA valuation multiples will be higher than SDE valuation multiples for the same business. While this seems obvious, one would be surprised how many business sellers expect to receive EBITDA multiples applied to their SDE calculations because they had “heard of” these multiples in some rudimentary research and did not fully understand the differences. Even when the correct multiple is applied, the truth is that multiples have a range of values for each industry. Often, the size of the business is one of the biggest factors that impact this range and what value should be applied. Bigger business simply commands bigger multiples and smaller business typically warrant smaller multiples. For example, regardless of the industry, business with SDE values at or below $100,000 will typically only command a multiple of 2X, while businesses with SDE values over $1MM will often command multiple that or close to twice that value. Beyond the size of the business cash flow, other factors that can impact what value should be applied include the growth and growth potential of the business, the level of owner or customer dependence, to consistency and quality of the financials, the competitive outlook, and the strength of the management and the team among others.
Often overlooked in this process is the buyer’s need for financing. As the vast majority of small business are purchased with SBA financing, it is vital that a business broker consider and evaluate the likelihood of buyer SBA financing in establishing an asking price for the business. In speaking with SBA lenders, we are surprised when we are told that this is rarely done. An experienced broker needs to evaluate what income adjustments they can defend to and will likely be accepted by a lender. They must also have a rigorous analysis of comparative same-industry business sales and, like a good lawyer defending a client, develop a sound case for why their clients business can justify earnings multiples that are above the norm.
Taking all of these elements into consideration, a skilled broker can work with their clients to develop sound values and listing prices that maintain the “Goldilocks” objective—not priced too high or too low, but “just right”. As a business owner considering the sale of your business you need to keep these considerations in mind as well. This means evaluating brokers not on which one suggests the highest selling price, but rather which one appears to be the most competent and qualified. Remember, if it sounds too good to be true, it usually is. Good and ethical brokers will not always tell you want you want to hear, but if you trust in their skill and expertise, will be able to council you on what you need to know and understand.
With over three decades of experience buying and selling business, and as the most accredited brokerage in Colorado, we are proud of our track record and know that we consistently provide our clients with the skill, knowledge, and expertise that they can trust to develop the optimal exit strategies for their business.
If you are considering selling your business, we would love to discuss this with you further. Feel free to contact us through our website, www.rockymountainba.com or call or email us at (303) 474-5582 or info@rockymountainba.com.