Priyanka Prakash

In this article, we’ll share with you the average costs of buying a business, including a breakdown of prices by industry, and give you a brief overview about how to estimate the price of a small business based on its earnings. We will also help you figure out a budget to see what kinds of businesses you can afford to purchase. For a more detailed explanation about how to estimate the worth of a small business, including a step-by-step example, see our complete guide to valuing a business. Average Costs of Buying a Business By Industry If You Have Under $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 Amusement 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 Over $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 It’s not to early to start thinking about financing! In fact, you should be thinking about how you are going to finance buying a business well before meeting with sellers. Just like when you’re buying a house, a buyer that comes with the ability to move forward quickly has an advantage. Get started by checking your credit score. If you don’t know your credit score, you can find out for free . Even if you have a strong credit score, most lenders will want you to put up at least 30% of the purchase price. A popular option is using funds from your retirement account. This can be done without incurring an IRS penalty using a ROBS. We recommend reading Is a ROBS right for you? The Typical Price You Will Pay When Buying a Business If you haven’t narrowed down the industry in which you want to buy a business, you may be interested in more general data. Here is the latest data concerning median prices when buying a small business. This data comes from BizBuySell, the leading business-for-sale site where you can find thousands of small businesses for sale. $185,000 = Median Sales Price for businesses sold in 3rd quarter of 2015 $438,000 = Median Revenue for businesses sold in 3rd quarter of 2015 $100,000 = Median Cash Flow for businesses sold in 3rd quarter of 2015 These are median figures, meaning that they are the direct middle point for each of their respective data sets. For example, if one business sold for $100,000, one for $250,000, and one for $750,000, $250,000 would be the median, because it has the exact same number of figures on each side of it in the data set. Median figures aren’t as accurate as averages, but they do provide a good rough estimate of what you can expect to pay when buying a business. Median Sale Price The median sale price of a business has been in the range of $150,000 to $200,000 for the last 4 years. It slipped slightly from 2014 ($189,000) to 2015 ($185,000). According to BizBuySell, this is probably because buyers paid less due to the slightly higher costs of running a business in 2015. However, overall, buyers in today’s market are confident about the ability to earn a good return on their investment, so they are paying close to the seller’s asking price of the business. The average asking price of a small business in 2015 was $200,000. $200,000 = Median asking price for businesses sold in 3rd quarter of 2015 $185,000 = Median selling price in the 3rd quarter of 2014 Median Revenue Over the last four years, median revenue for sold small businesses increased from around $375,000 in the third quarter of 2011 to $438,000 in the third quarter of 2015. This indicates that people are buying bigger businesses now than in the recent past. $375,000 = Median Revenue for Sold Small Businesses in the 3rd Quarter of 2011 $438,000 = Median Revenue for Sold Small Businesses in the 3rd Quarter of 2015 Median Cash Flow (Seller’s Discretionary Earnings) BizBuySell’s Insight reports and listings refer to a business’ “cash flow” number, which is the net income of a business after you add back in the owner’s salary and certain other expenses (full list of inclusions here). This figure is also known the Seller’s Discretionary Earnings (SDE) of a business. This number is very important because it is the one figure that best represents what you can actually expect to earn as an owner of a business. It is also important because it is the main number that is used to calculate a business’ value (explained further below and in this article). Median cash flow of sold small businesses has held pretty stable over the last 3-4 years in the $80,000 to $100,000. $80,000 - Median Cash Flow for Sold Small Businesses in the 3rd Quarter of 2011 $100,000 - Median Cash Flow for Sold Small Businesses in the 3rd Quarter of 2015 Using Seller’s Discretionary Earnings to Determine Specific Business Pricing The general sales numbers above are great for giving a general estimate. However, the reality is people spend quite a bit lower or higher than the average when buying a business. To get a more specific estimate of a business’ value, you must use Seller’s Discretionary Earnings (SDE). Once you have SDE, you can then use the following formula to estimate a business’ value: SDE x Industry Multiplier     + Real estate     + Accounts/receivables     + Cash on hand     + Any other assets not included in the SDE multiplier     - Business liabilities = Business’ Estimated Value Here’s how this works step by step: Calculate SDE SDE gives you a good estimate of a business’ true revenue potential. You can calculate SDE by taking the net income of a business, as reported on its tax return, and adding back certain expenses. You should add back the owner’s salary, expenses that are aren’t essential to running the business, and one-time expenses that are unlikely to recur. According to Wayne Quilitz, President of business brokerage firm Murphy Valuation Services, here are some examples of things that would be added back into the net income reported on the business’ tax return to calculate SDE: Owner’s salary and perks Family members on payroll Non-cash expenses such as depreciation and amortization Leisure activities, such as business golf outings Charitable donations Any personal expenses, such as the purchase of a personal vehicle, that were noted as expenses on the business tax return Business travel that’s not essential to running the business. One-time expenses that are unlikely to recur after the sale of the business, such as the settlement of a lawsuit Find out the right SDE multiplier Generally, businesses sell for somewhere between 1 and 3 times SDE.  This is called the SDE multiple or multiplier, and it varies based on industry and geographic trends (market risk), company size, the business’ tangible and intangible assets, independence from the owner (owner risk), and many other variables. This is probably the most subjective part of valuing a business because so many factors affect which multiple you should use. You can find out an approximate SDE multiple by looking at BizBuySell data. They list multiples by industry. BizBuySell uses the term “cash flow multiple,” but this is the same thing as SDE multiple. The average SDE multiple for all sold businesses in 2015 was 2.28. SDE x 2.28 = Average business value Add other business assets to get business valuation As a last step, you must add in assets that were not included in the SDE multiplier. For instance, real estate, accounts receivables, and cash on hand must be added, and liabilities (e.g. debt,  interest) must be subtracted to get a business’ final valuation. If this sounds too complicated, you can also skip the math and just hire a professional appraiser. They will value the business for you and will charge around $2,000 to $3,000. Just keep in mind that while a professional appraisal can be more accurate, it also leaves less room for negotiation between the buyer and the seller. How Industry Affects the Value of a Business The sales price of a business can fluctuate a lot depending on industry. That is why it is also important to take industry specific details into account when buying a business and trying to figure out the price tag. We decided to take a look at restaurants because they account for nearly a quarter of all small business sales (24%), easily making them the highest selling single category of small business (buy a significant margin). Other high-selling small businesses include dry cleaners/laundromats, bars/taverns, and convenience stores. We included statistics from Dry cleaners/laundromats because they are the 3rd highest category of business sold and are very different in nature than restaurants, making them an interesting comparison. Here is the information for sales in the Restaurant and Dry Cleaning/Laundry industries from the report:   There are several interesting differences that are worth discussing. Sales Price One of the first conclusions to draw from the data, is that on average, restaurants sell for around $70,000 cheaper than dry cleaning/laundry service businesses. So, if you are undecided between the two and are just looking for the cheaper option, then this difference in average price might point you to purchasing a restaurant. Revenue & Cash Flow The differences between median restaurant revenue and median dry cleaning business revenue is significant, with restaurants bringing in nearly twice the revenue of dry cleaning businesses. However, restaurants also have high operating costs compared to laundromats. Laundromats’ primary costs are employees wages, equipment maintenance, and utilities (water, electricity, etc). Restaurants tend to have more employees on average and more ongoing costs (purchase of food, drink, etc.). As a result, both industries have roughly similar cash flow even though restaurants bring in much more revenue. This would explain the major difference in the SDE multiples of the two industries, 1.89(restaurants) vs. 2.69 (dry cleaning/laundry). Also, dry cleaning/laundromats are generally assured of consistent and repeat customers. Unless a customer buys a washer and dryer, there is very little reason for them to switch laundromats or stop coming to a laundromat. If the atmosphere is safe and the equipment works, they are set. Market Risk & Owner Risk Industry and geographic trends influence the value of a business. This is often referred to as “market risk.” A restaurant is a much more volatile industry when it comes to customer retention. They are constantly competing with other restaurants on multiple fronts (price, food quality, service). If a customer has one incident of bad service or poor food quality, they may never come back. In other words, the transferability and sustainability of a restaurant business is much less assured than that of a dry cleaner/laundromat would be (there are exceptions of course). Owner risk refers to how independent a business is from its current owner. Laundromats can transfer ownership fairly easily with minimal impact on the customer base. In contrast, a restaurant is often highly dependent on the owner. People may come to the restaurant because it’s owned by a member of the local community or because a certain chef works there. If this changes, they may stop going to the restaurant. This is why looking at industry specific multipliers is so important when trying to figure out how much you can expect to pay for a specific business. Looking to buy a business? Click here to get our FREE Guide: How to Buy a Business. Bottom Line The point of all of this is to demonstrate how statistics (averages, medians, multipliers) can help you get a good idea of what to expect to pay when buying a business. These also give you clues as to why certain businesses are selling for more or less than other businesses. Using industry specific multipliers, you should be able to pinpoint a pretty accurate estimate of how much you can expect to spend when buying a business. As you can tell, a business purchase can get pricey.