What a business owns = tangible and
intangible assets. The tangible assets are the furniture, fixtures,
equipment, inventory, and real estate. The intangible
assets can include the trade name, contracts, leases,
client lists, licenses, recipes, and patents.
What a business earns provides a
certain financial benefit to the owner. The benefit generally comes in the form
of business profits and a salary to the owner. It can also provide
the owner with fringe benefits such as health insurance,
a company car, or a retirement plan.
operated businesses with sales of $1 million or less
generally sell for the value of the assets, plus one
to three times the earnings. If the earnings are stable
and growing, the value is on the higher end. If the earnings
are variable or declining, the value is on the lower
Businesses with sales of $1 million to $10 million
may sell for straight earnings multiples of three
to six. A thorough investigation of the financial
information is required to uncover the true earnings
capability of the business. Again, if the earnings
are stable and growing, a higher multiple is used.
If the earnings are variable or declining, a lower
multiple is used.
Businesses with sales of more than $10 million often
have specific industry criteria, which may be applied
to determine the value. At this level, Buyers may
be paying for market share, rights to patents and
processes, additions to product lines, or the benefits
of strategic or administrative consolidation.
industries have one or more rules or thumb. However,
they can vary widely and in most cases do not give
an accurate value of a business. Since each business is
unique, a particular rule of thumb can be off by as
much as 100% or more. The business broker will be able to
decide what is the most relevant information about
a business and then make an informed decision about its
valuation is as much an art as a science. While the business
broker does employ standardized formulas and methods
to calculate value, he works from assumptions that are
based on his experience in the market place and his familiarity
with the similar businesses. This process includes the
selection of the most appropriate risk and return variables.
In this way, his applied expertise leads to the best
calculations of value for a specific business.
is asked quite often from a business owner as to whether
they should get an appraisal for their business. Our
position on this matter has normally been no. The reason
for this is that an appraisal is a valid way to arrive
at a value for a commercial building or a piece of real
estate, but in the case of a business it is much more
difficult to asses a value.
For example - when an appraisal
is done on a building or piece of property the chances
of the value of that item changing in the next 12 months
is rare unless there is a vacancy or a big change in
the local market. But, generally the property continues
to follow the local appreciation level and grows accordingly.
This however, is not so in a business. In a business
we like to think of it as trying to get your hands around
jello. It is hard to get a hold of and is constantly
If the business loses one of its top
customers then the value goes down regardless of whether
it has been successful for the last several years and
if the business picks up additional customers does that
enhance the value of the business! I think you get the
picture. So be sure to surround yourself with a business
broker that is knowledgeable and understands how values
can vary in business to business and market to market.
American Business Brokers
Business Brokers - Mergers & Acquisitions
Businesses for Sale - Business Consulting
Franchise Opportunities - Business Valuations
Phone: 888-800-6898 Fax: 305-574-0173
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