How to Sell Your Business: Understand Value and SBA Loans
Selling your business is a big step. Many owners wonder, “How much is my business worth?” and “How does the process work?” This guide breaks it down in simple terms, so you can understand the key factors that influence your business’s value and how to set the right price.
Key Terms Made Simple
- SBA Loan: A government-backed loan with better terms for small business buyers.
- Debt Coverage Ratio (DCR): Your business needs to earn 25% more than the loan payment.
- Maximum Value: The highest price a buyer can pay while meeting loan rules.
- Multiples: A way to estimate value by multiplying your earnings. Most small businesses sell between 3x and 4.5x their earnings.
Why SBA Loans Matter When Selling Your Business
Most small business buyers use SBA (Small Business Administration) loans because they offer lower interest rates and longer repayment terms. If your asking price doesn’t fit within SBA loan limits, you’ll lose many potential buyers.
Bottom line: Pricing your business within SBA loan guidelines increases your chances of selling quickly and receiving the full sale price in cash.
Why Selling Price Expectations Matter
Many owners believe their business is worth more than buyers can pay. If your business earns under $1 million annually, buyers relying on SBA loans face limits.
High-profile deals may sell for 5x or 6x earnings, but small businesses usually don’t.
What this means for you:
- Set realistic expectations to attract serious buyers.
- SBA-backed sales close faster and with more certainty.
- You’ll likely get most of your money in cash at closing.
What Determines Your Business's Selling Price?
- Profitability: Higher profits mean a higher selling price.
- Cash Flow: Your business needs to generate enough cash to cover the buyer’s loan payments and salary.
- Industry Trends: Some industries attract more buyers and higher prices.
- Loan Terms: Interest rates and loan length affect how much a buyer can borrow.
How the Selling Process Works
Step 1: Business valuation based on earnings and market trends.
Step 2: Set a realistic price within SBA loan limits.
Step 3: Market your business to qualified buyers.
Step 4: Negotiate offers that meet loan standards.
Step 5: Close the sale with the buyer’s SBA loan approval.
How to Use the Calculator Below
If you’re planning to sell your business, understanding how much a buyer can finance through an SBA loan is essential. The SBA Loan Calculator helps estimate the maximum deal size that can be funded. Follow these steps to determine your business’s ceiling value:
Step 1: Gather the Necessary Information
Before using the calculator, collect the following details:
- Cash Flow: This is your business’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization.) This number should include the owner’s compensation.
- Owner’s Salary: Estimate what the new owner will need to live on, including salary, benefits, and payroll taxes.
- Interest Rate: The standard SBA loan interest rate is Prime Rate + 3%. Check the current Prime Rate to get an accurate calculation.
Step 2: Enter the Values into the SBA Loan Calculator
- Input your cash flow value.
- Add the estimated owner’s salary (salary + benefits + payroll taxes).
- Set the interest rate as Prime + 3%.
Step 3: Analyze the Results
- Adjust the cash flow and interest rate values to see how they affect the maximum deal size.
- Notice that cash flow has a much greater impact on business valuation than the interest rate.
Step 4: Determine Your Business’s SBA Loan Ceiling
- The calculator provides an estimated maximum deal size that can be funded through an SBA loan.
- This is the most likely amount you can receive if your buyer uses SBA funding.
If the SBA ceiling value aligns with your expectations, you can proceed with buyer negotiations. If it’s lower than expected, consider other financing methods or improving cash flow before selling. To discuss your specific business situation, reach out for a consultation with an SBA loan expert or business broker.
SBA Loan Calculator
Need Help Selling Your Business?
As an experienced business broker, I help sellers:
- Understand how much their business is worth.
- Set realistic prices that attract buyers.
- Navigate the SBA loan process for a smooth sale.
Contact me today to start your business sale journey with expert guidance.
