We’ll be sharing with you the average cost of buying a business. This includes a breakdown by industry and a quick overview of how to calculate the small business’s value based on earnings. You will also be able to determine a budget and see which businesses you can afford.
Our complete guide to valuing small businesses provides a detailed explanation of how to value a small business.
Average costs of buying a business by industry
If you have less than $250,000 to invest
- Beauty Salons/Barber Shops – $80,000
- Landscaping and Yard Services – $128,500
- Restaurants – $128.750
- Other eating and drinking places – $130,000
- Apparel and Accessory Stores: $160,000
- Entertainment and Recreation $165,000
- Convenience Stores $175,000
- Bars/Taverns – $195,000
- Dry Cleaning/Laundry Services – $199,000
- Auto Repair, Parts, and Services: $240,000
If you have more than $250,000 to invest
- Gasoline service stations – $252,500
- Liquor Stores – $270,000
- Supermarkets – $270,000
- Educational Services – $275,000
- Health, Medical, Dental – $325,000
- Construction-Special Trades – $356,000
- Durable Goods – $431,500
- Hotel and other Lodging Places – $542.750
- Fabricated Metal Products – $725,000
- Lumber and Wood Products – $1,175,000
You don’t have to wait too long to begin thinking about how to finance. You should think about how you will finance the purchase of a business before you meet with sellers. A buyer who is able to move quickly, just like when buying a house. Start by checking your credit score. You can get a free report if you don’t have a credit score.
Lenders will require that you contribute at least 30% of the purchase price, even if your credit score is excellent. You can also use funds from your retirement fund. You don’t have to pay an IRS penalty for using a ROBS. We recommend that you read Is it right for me?
The Average Price of Buying a Business
You may be interested to see more data if you don’t have a narrower focus on the industry you are looking for a business. Here are the most recent data on median prices for small businesses. BizBuySell is the most popular business-for-sale website where you can find thousands small businesses to buy.
- $185,000 = Median Sales Price Businesses sold in the 3rd Quarter of 2015.
- $438,000 = Median Revenue for businesses that were sold during the 3rd Quarter of 2015.
- $100K = Median cash Flow businesses that were sold during the 3rd quarter 2015.
These figures are called medians, which means they represent the middle point of each data set. If one business sells for $100,000, another for $250,000 and one for $750,000 respectively, then $250,000 would be the median. This is because the data set has exactly the same numbers on both sides of the business. Although median figures may not be as precise as averages, they can give an estimate of the price you should expect to pay for a business.
Median Sale Price
For the past 4 years, the median sale price for a business was between $150,000 and $200,000 It fell slightly between 2014 ($189,000), and 2015 ($185,000). BizBuySell says this could be due to lower prices because of the higher running costs of a business in 2015. The average asking price for a small business in 2015 was $200,000. In 2015, the average asking price for a small business was $200,000.
- $200,000 = Median asking prices for businesses that were sold during the 3rd Quarter of 2015.
- $185,000 = Median Selling Price in the Third Quarter of 2014.
The median revenue of small businesses that were sold has increased by $438,000 over the past four years from $375,000 in 2011, to $438,000 in 2015. This shows that people are now buying larger businesses than they were in the past.
- $375,000 = Median Revenue from Sold Small Business in the 3rd Quartary of 2011.
- $438,000 = Median Revenue from Sold Small Businesses during the 3rd quarter of 2015.
Median Cash Flow (Seller’s Discretionary Earnings).
BizBuySell’s Insight listings and reports refer to a business’ cash flow number. This is the net income after subtracting the owner’s salary (full list ). This number is also called the Seller’s Discretionary Earnings of a business.
It is important because this number best represents the amount you can expect to make as a business owner. It is also crucial because it is the number used to calculate the business’ value (explained below and in this article).
Over the past 3-4 years, the median cash flow from small businesses sold has remained fairly stable at $80,000 to $100,000.
- $80,000 – Median Cash flow for Small Businesses Sold in the Third Quarter 2011
- $100,000 – Median Cash Flow from Sold Small Businesses during the Third Quarter 2015
Use Seller’s discretionary earnings to determine specific business pricing
These sales figures are great for estimating the general market. The reality is that people often spend more or less than the average on a business purchase. Seller’s discretionary earnings (SDE) can be used to get a more precise estimate of the business’s value. The following formula can be used to estimate the business’s value once you have SDE.
SDE x Industry Multiplier
+ Real estate
+ Cash on hand
+ All other assets that are not included in the SDE multiplier
– Business liabilities
= Business’ Estimated Value
This is how it works step-by-step:
- Calculate the SDE
SDE can give you an accurate estimate of the business’s true revenue potential. SDE can be calculated by adding certain expenses to the net income of a company, as reported on its tax returns. Add back the owner’s salary and any other expenses that aren’t necessary to run the business.
Wayne Quilitz, president of Murphy Valuation Services business brokerage, explains that there are certain things that can be added to the net income of a business to calculate SDE.
- The owner’s salary and perks
- Family members on the payroll
- Other expenses, such as amortization and depreciation, are not cash.
- Business golf outings are a great leisure activity.
- Charitable donations
- Personal expenses such as the purchase or lease of a vehicle that were not included in the business tax return are noted as expenses
- It is not necessary to travel for business purposes.
- One-time expenses that are not likely to recur following the sale of the company, such as the settlement or litigation costs
- Get the correct SDE multiplier
Businesses typically sell for between 1 and 3 times the SDE. This is the SDE multiplier or multiple. It varies depending on market risk, industry and geographical trends, company size, tangible and intangible assets of the business, owner risk, and other variables. This is the most subjective aspect of valuing businesses because there are so many variables that can affect which multiple to use.
BizBuySell data can help you find an estimate SDE multiple. Multiples are listed by industry. BizBuySell uses “cash flow multiple”, but this is not the same as SDE multiple. In 2015, the average SDE multiple of all businesses sold was 2.28.
SDE x 2.28 = Average Business Value
- Add business assets to obtain business valuation
You must also add assets to the equation that are not part of the SDE multiplier. You must add assets such as real estate, cash on hand, accounts receivables and cash on bank. Liabilities (e.g. To get a final value for a business, you must subtract interest and debt.
This may sound too complex, but you can hire an appraiser to do the math for you. The professional appraiser will assess the business and charge you between $2,000 and $3,000. A professional appraisal is more accurate than a personal appraisal, but it leaves less room for negotiation between buyers and sellers.
How industry affects the value of a business
There are many factors that can affect the sales price of a business. It is important to consider industry-specific details when purchasing a business or trying to determine the price tag.
Because restaurants account for almost a quarter (24%) of all sales in small businesses, we decided to look into them. They easily make up the most popular category of small business (buy a substantial margin).
Other high-selling small businesses include dry cleaners/laundromats, bars/taverns, and convenience stores.
Because Dry cleaners/laundromats are the third most popular business category, and because they are so different from restaurants in nature, we included them in our statistics.
The report contains information about sales in the Dry Cleaning/Laundry and Restaurant industries.
There are many interesting differences worth discussing.
The data shows that restaurants are on average $70,000 more expensive than dry cleaning/laundry services businesses. If you’re not sure which option you prefer, or are looking for the cheapest, this difference in price could be a reason to consider purchasing a restaurant.
Revenue and Cash Flow
There are significant differences in median restaurant revenue and median revenue from dry cleaning businesses. Restaurants bring in almost twice as much revenue than dry cleaning businesses.
Restaurants have higher operating costs than laundromats. The primary expenses for Laundromats are wages and equipment maintenance. They also have to pay utilities like water, electricity, and water. Restaurants have on average more employees and higher ongoing costs (purchase of food and drink, etc.). Both industries have similar cash flows, even though restaurants generate more revenue. This would explain why the SDE multiples for the two industries are so different, 1.89 (restaurants) and 2.69 (dry cleaning/laundry).
Dry cleaning/laundromats generally have repeat customers and are therefore more likely to be reliable. Customers should not switch washers and dryers unless they have purchased washers and dryers. They are ready if the environment is safe and the equipment functions properly.
Market Risk & Owner Risk
The value of a business is affected by its industry and geographical trends. This is commonly referred to as “market risks.” Restaurants are more volatile when it comes to customer retention. Restaurants are constantly in competition with each other on many fronts, including price, quality, and service. One bad experience or poor quality of food can turn a customer off.
This means that the sustainability and transferability of a restaurant business are less likely than those of a dry cleaner/laundromat. However, there are exceptions.
Owner risk is the degree of independence a business has from its owner. Transferring ownership of Laundromats is easy and has minimal impact on customer base. Restaurants, on the other hand, are often dependent on their owner. A restaurant may be owned by someone in the community, or because a chef works there. They may not return to the restaurant if this happens.
It is important to look at specific industry multipliers when determining how much you can pay for a business.
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All of this is meant to show how statistics (averages medians multipliers) can give you a good idea about what you should expect to pay for a business. These statistics can also help you understand why some businesses sell for less or more than others.
You can use industry-specific multipliers to get a fairly accurate estimate of the amount you can expect to spend on a business purchase. A business purchase can be expensive, as you can see.