Return on Investment
Most small to medium businesses are sold using the capitalisation of earnings multiple. This means purchases are prepared to pay a multiple of the business earnings. When calculating the earnings of a business, it is necessary to remove any expenditure by the proprietor of the business. To do this, earnings are calculated as Earnings Before Interest, Tax and Proprietor’s Income (“PEBIT”).
Using this method, a purchaser may pay $330,000 for a small business with an PEBIT of $100,000 at a capitalisation rate of 30% ($100,000/30%).
As a guide, a business can sell between 1.5 and 7.0 times PEBIT, depending on the attributes of the business.
One Business Brokers is a corporate advisory firm specialising in the sale of small to medium size businesses. Contact One Business Brokers for a free market appraisal of your business.