Whether you are buying or selling, the price of a small business usually comes down to one question: how much does it earn for its owner, and how safe is that income? This guide explains the methods buyers and sellers use, with a worked example.
Start with the owner’s profit
The starting point is the profit the business makes for its owner in a year: sales minus all running costs. Then add back anything that will not continue under a new owner, such as the salary the owner pays themselves or a one-off repair. Advisers call this figure seller’s discretionary earnings, or SDE.
Use the last 12 months, or an average of the last two or three years if sales go up and down.
Multiply it by a fair multiple
Most small owner-run businesses sell for roughly one to three times the owner’s yearly profit. The multiple is how many years of profit a buyer is willing to pay for up front, so it rises when that profit looks safe and lasting, and falls when it looks fragile.
What raises or lowers the multiple
- Steady or growing sales over several years raise it.
- A long lease at a fair rent raises it; a lease that ends soon lowers it.
- A business that runs without the owner every day is worth more than one that depends on them.
- Many different customers are safer than a few large ones.
- Trained staff who will stay, and modern equipment, add value.
- Missing records, falling sales or disputes lower it sharply.
Asset value: the floor
For a business that makes little or no profit, buyers usually pay for what they can see: equipment, fit-out and stock, at their used value. This is often the least a business is worth, and it is how many new or loss-making cafes and salons are priced.
Why sales figures alone mislead
A business with high sales can still make little profit after rent, salaries and stock. That is why prices based on sales alone, a revenue multiple, are rarely used for small businesses. Always ask what is left for the owner.
A worked example
Take a cafe with sales of 120,000 BHD a year and running costs of 96,000 BHD, which include a 12,000 BHD salary the owner pays themselves. The owner’s profit is 120,000 − 96,000 + 12,000 = 36,000 BHD.
If the cafe has steady sales and four years left on its lease, a multiple of about two is reasonable, which gives roughly 72,000 BHD. With only one year left on the lease, a buyer would likely offer less, because the profit is less certain.
These numbers are for illustration only.
From value to asking price
Sellers usually ask a little more than the value they expect to accept, to leave room to negotiate. Compare your figure with similar businesses for sale, and for larger or more complex businesses, consider a professional valuation.
Common questions
What is goodwill?
Goodwill is the part of the price above the value of the business’s assets. It pays for the customers, the name, the location and the earnings the business has built up.
What if the business is not profitable?
It is usually priced close to the value of its equipment, fit-out and stock, plus something for the location or the lease if it is a good one.
Should I pay for a professional valuation?
For a small business with clear records, this guide and comparable listings are often enough. For larger deals, or where property or several branches are involved, a professional valuation is worth the cost.
Is the asking price the same as the value?
Not usually. The asking price is where the seller starts; the value is what a well-informed buyer will actually pay.
Where to go next
This guide is general information, not legal or financial advice. Rules and requirements change, so check the details with the relevant authority or a qualified adviser before you act.