How to Determine Business Valuation When Buying a Business

How do you determine the value of a business that you are interested in buying? This is a critical question that you need to answer if you want to purchase a business for the right amount and you want to avoid paying too much.

In this video, Vested Business Brokers owner and CEO, Nathan Goldstein explains the concept of multiples as it applies to determining business valuation in the purchase and sale of a business.

The Basics of Business Valuation

Privately held businesses sell based on owner’s discretionary cash flow, which is the monetary benefit to the operating owner. Here’s an example of how to determine business valuation:

First, take all the income that the business makes, let’s say for instance the owner or manager of the business takes an officer’s salary of $150,000 a year and then after they pay payroll and all the expenses, let’s say there is another $50,000 there. Now, the value is $200,000.

Next, we need to account for any “add backs”.  Add backs are benefits that a seller would have over and above his salary. For instance, if he pays his car through the business we would need to take whatever amount that is and then include it to thee final number as an add back. Likewise, if the owner pays for anything, such as health insurance, life insurance, disability insurance…those are all add backs.

After accounting for the owner’s salary, as well as any and all add backs we would get to a particular number, let’s say that will all those add backs it adds another $25,000 for the year…a grand total $225,000.

The Concept of “Multiples” and Its Effect on Business Valuation

Every business trades at a different multiple. A “multiple” is an industry term which refers to the yearly business value (owner’s discretionary cash flow) and whether the market value of that particular business is worth 1x, 2x, 3x, or more of that yearly value.

What this means is that, for instance, certain types of businesses, for example those that are absentee owned, will trade at a higher multiple than a company that has to be run by an operator or the owner.

Why is this so? Think about it…if you have a business that is an absentee run business, it will always trade at a higher multiple because the person who is buying the business will have the ability to keep his regular job which would mean that the new income derived from the absentee business would be added income instead of his whole income. Does that make some sense to you? I hope it does.

If you have any questions about this you can always call Vested’s main office at (877) 735-5224. We would be delighted to answer any questions that you might have.

Now, those multiples are generated by what we call here at Vested, “a moving market”. A moving market value is generated by how many listings we have in a particular market, what geographical area the business is selling in and then we pay it in a live moving market. We could tell you at Vested what the average cost of goods is, what the average payroll is, what the average expenses are, what the benefits to the owners are, and then we come to what is called the multiple.

Essentially, we take whatever the benefit is and we times it by the multiple and that is typically how we come to the price. This system really works.. This way you are not over paying for the business because you are paying exactly what everybody else would be paying in the moving market.

When I first started this business 11 years ago car washes were trading in high, five to six time multiples. Today, because we peg it to the moving market, they are trading in the four time multiple because most of them are run absentee. We could tell you the statistics, we could show you the statistics, or we could bring you on our back end and show it to you so you could get comfortable with it. We want you to be able to do all your due diligence and take your time which is the most important part of any deal we are going to have with you. We want to make sure that you understand how the revenue is generated, you could prove where the generated revenue is and you feel comfortable with the numbers.

We strongly suggest that you get a competent accountant to help you unwind all the financial information that a seller has given us. These are their representations, not Vested’s and we want to make sure that you are comfortable with those numbers.

Call us at (877) 735-5224 for help with the purchase of a business for sale.

1,602 thoughts on “How to Determine Business Valuation When Buying a Business

  1. entretien ménager rive nord, service de femme
    de ménage
    Professionnelle de l’entretien, notre dynamique entreprise saura réaliser pour vus l’ensemble
    des travaux ménagers.
    G.E.M. s’engage sur une prestation de qualité !

    Ntre équipe de spécialistes chevronnés accomplira un travail à la fois soigné, rapide et
    économique.
    De plus, nois utilisons exclusivement des produits
    écologiques et hautement performants, issus des toutes dernières technologies.

    La vie moderne véhicule aussi de lourdes menaces.
    D’apparence inoffensive, meubles, appareils ménagers, matériaux de
    construction, jokuets ou objets familiers
    peuvent dégagerdes phtalates ou autres redoutables composés
    chimiques.
    entretien ménager résidentiel
    Franchise de Nettoyage Résidentiel et Commercial, service de femme de ménage ,entretien ménager commercial,entretien ménager commercial,
    ménage résidentiel, serviice d’entretien ménager montréal
    Nous aidons lles personnes désireuses d’être propriétaires d’entreprises
    prospères à devenir des professionnels ddu nettoyage commercial et
    de la maintenance. En rejoignant notre réseau
    d’entreprises, vous bénéficierez d’un avantage
    concurrentiel ainsi que d’une aide apportée par un modèle d’affaires
    éprouvé vous assurant de travailler avec un leader du domaine disposant de l’expérience eet la stabilité.

    Vous disiez augmentez vos revenus aafin d’améliorer votre quotidien ?
    Faites Aplel a G.E.M Ménage! service de fedmme
    de ménage ,entretien ménager commercial,entretien ménager commercial,
    ménage résidentiel, service d’entretien ménager montréal, service de
    femme dee ménage ,entretien ménager commercial,entretien ménager commercial, ménage résidentiel, service d’entretien ménager montréal
    Franchises de Nettoyage Résidentiel et Commercial disponible Partout
    A Montréal ,Rive Nord et Rive Sud.

    Financement Sans Intérêt par G.E.M .
    Un dépôt est obligatoire

    Un Investissement de 24 000$ Vous Rapporte (4800$ et plus dde Revenus par Mois)!

    Matériel et formation fourni

    Nous aidons les personnes désireuses d’être propriétaires d’entreprises
    prospères à devenir des professionnels du nettoyage
    commercial et de laa maintenance. En rejoignant notre réseau d’entreprises, vous bénéficierez d’un avantage concurrentiel ainsi que d’une aide apportée par un modèle d’affaires éprouvé vous assurant de travailler avec un leader du domaine disposant de l’expérience et la stabilité.

    G.E.M Ménage vous offre l’opportunité de travailler pendant la journée de lundi a
    vendredi .

    G.E.M Vous propose des contrats d’entretien ménager
    avec des horaires souples et un revenu garanti.

    Pour les personnes libres,les nouveaux arrivants
    ouu les sans-emplois G.E.M peut favoriser vptre accès au marché du travail !

    G.E.M vous propose des contrats stables et rémunérateurs!

    Dans le secteur résidentiel idéal pour un couple, ou un homme
    seul dans le secteur commercial
    Vous débuter des maintenant

    Des techniques et méthodes de travail éprouvées.

    Une aide à la constitution ou à l’enregistrement de leur entreprise.

    Dess terrritoires d’exercice protégés.
    Entreprise clés en main.
    Un garantie qui protège votre investissement

    Exigences de l’entrée de notre réseau :
    Les demandes sont examinées attentivement et une enquête relative à la candidature
    est menée.
    Les candidats doivent passer une entrevue de
    sélection.
    Avant tout début d’activité, les candidats doiven assister à des sessions de formation.

    Au G.E.M. nous nous assurons que nos franchisés
    puissent offrir à leurs clients un service professionnel
    d’une qualité supérieure à cdlle dee la concurrence.

    Franchise disponible au résidentiel et commercial

    N’hésitez pas à nous contacter
    469 Jean-Talon Ouest Suite # 222
    Montreal QC
    gemmenage.net
    gemmenage.com

Leave a Reply

Your email address will not be published.