How to value a small business

Here’s a specific example of valuing a restaurant business using SDE and a multiple:

Restaurant Financial Information:

• Net Income (from tax return): $150,000
• Interest Expense: $15,000
• Depreciation Expense: $20,000
• Amortization Expense: $5,000
• Owner’s Salary: $75,000
• Owner’s Benefits: $10,000
• Discretionary Expenses: $5,000

Calculating SDE:

1. Start with Net Income: $150,000
2. Add back Interest, Depreciation, and Amortization: $15,000 + $20,000 + $5,000 = $40,000
3. SDE (before owner’s compensation adjustment): $150,000 + $40,000 = $190,000
4. Deduct Owner’s Salary and Benefits: $190,000 – $75,000 – $10,000 = $105,000
5. Subtract Discretionary Expenses: $105,000 – $5,000 = $100,000 (SDE)

Applying a Multiple:

• Typical SDE multiples for restaurants range from 2.14x to 2.96x.
• Let’s assume a multiple of 2.5x for this example.

Valuation Calculation:

• SDE: $100,000
• Multiple: 2.5x
• Estimated Business Value: $100,000 x 2.5 = $250,000

Interpretation:

• Based on this calculation, the estimated value of the restaurant business using the SDE method and a multiple of 2.5x is $250,000.

Additional Considerations:

• The actual multiple used can vary based on factors such as:
  • Location
  • Type of restaurant (fast-casual, fine dining, etc.)
  • Financial performance
  • Growth potential
  • Brand reputation
  • Market conditions
• It’s essential to consult with a professional business valuation expert for a comprehensive and accurate assessment, as they can consider these factors and provide tailored guidance.