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.

Why Do Entrepreneurs Like Buying Absentee Based Businesses?

Absentee Based businesses offer certain advantages that owner-operated business do not. In this video, Vested Business Brokers owner and CEO, Nathan Goldstein discusses some of the advantages of the absentee based business and why these advantages appeal to the entrepreneurial business buyer…

This is Nathan Goldstein of Vested Business Brokers, we help people buy and sell privately held businesses. Today I’m going to explain why an absentee based business would trade at a higher multiple than a non absentee based business.

Well, if you are an entrepreneur who wants to own multiple business and you find an absentee based business, you could continue to operate your other businesses. Most of our clients are owner operators where they will come in, run the business and they will scale the business themselves. But from time to time, here at Vested, we do get absentee owned businesses.

There are some specific categories of businesses that are easier to run absentee than others. Gas stations, car washes, Laundromats, sometimes liquor stores depending on the size of the liquor store, can easily be run on an absentee based business. Those businesses will trade at a higher multiple.

Think of this when you think about absentee based businesses, think of the pleasure of sitting down in a lounge chair on a sunny beach somewhere. Maybe not if you are in the Northeast but if you are in Florida. Then at the end of the week there is money deposited into your bank account. You go to the deposit and you are able to get your paycheck because your absentee based business covered it. That is an unbelievable feeling. I hope you experience that feeling, have a cold tropical drink on me.

Are you an entrepreneur who is interested in owning an absentee based business? If you are then call us today at (877) 735-5224 to see what kind absentee businesses for sale we have in our huge and growing database.

One of our experienced business brokers will work with you personally to help you find a great absentee business which will put profits in your pocket while you sit on the beach, play golf, travel the world, etc.

How to Buy a Business – What is a Letter of Intent?

When buying a business you should always sign a letter of intent. So, what is a letter of intent…or LOI, for short? A letter of intent is a written offer which underscores your interest in a particular business.  The benefits of having a letter of intent are explained in this video…

A letter of intent typicaly includes what is called a No Shop Clause which prevents the seller from “shopping” the business for a two week period while you, the buyer, are doing your due diligence.

So, the letter of intent provides you with the security that you can conduct your due diligence thoroughly and that the business will not be sold out from under your nose during that period of time.

A letter of intent also acts as a guideline that both the seller and the buyer use to structure the deal. Letters of intent are really great because you hand them off to your lawyers and the lawyers know exactly what the deal is. There is no guess work.

Years ago buyers and sellers didn’t have a formal process in the letter of intent process. We would send the seller off to his lawyer and we’d send the buyer off to his lawyer and when they both came back with the deal, it was completely different in terms and price than what they had all agreed on.

Therefore, the letter of intent acts like the “pre contract” of what everybody agrees on what the deal should be. Then everybody has time to take a deep breath, do their due diligence, look under the covers, figure out what the business is, and make sure that the seller can prove all his representations to you. But he can’t sell the business out from underneath you to somebody else because he has a No Shop Clause in the letter of intent.

Typically we take a five thousand dollar good faith deposit, Vested will hold that deposit for you and if, for any reason, you are uncomfortable with that particular deal you will get refunded that money.

Do you have any questions about letter of intent or how to buy a business? If you do then call Vested Business Brokers today at (877) 735-5224 to get all your questions answered by an experienced business broker.

Laundromat Businesses for Sale at Vested Business Brokers

Vested Business Brokers has a large and growing number of laundromat and dry cleaning businesses for sale in its huge and expanding database of businesses for sale. The video below shows only a small sample of the laundromat businesses Vested has to offer.

Laundromat and dry cleaning businesses are desired by many business buyers. Therefore, it is our advice that if you see one on our site that you like to take a closer look at you had better move quickly. Call one of our brokers today and let him or her know that you’re interested. You can be sure that the highly profitable laundromat or dry cleaner business you see available today may not be on the market for too long. So act fast!

If you’re interested in buying a laundromat or dry cleaner business call Vested Business Brokers today at (877) 735-5224 to speak to one of our experienced brokers.

The 2 Most Important Factors for Buying a Business

When you’re looking to buy a business, what are the key components that are the most important factors from the buyer’s perspective?  The answers are revealed in this video…

Profitability…

Profit is the number one. You want to buy a profitable, privately-held business. You want to make sure that the seller can prove his numbers to you, and that you have the sense that they have historical financial information that you can dig into with your experts to make sure that you’re buying a profitable business.

Location, Location, Location…

Second-most important aspect of the deal is the lease. Location, location, location! I remember my dad telling me years ago, “You want to create wealth in real estate, you have to buy location.” Folks, location in businesses is 99.9% of the time the most important factor because it’s where the traffic is driven.

You’ll know right away if you have a good location because the revenue and the profits of that location run hand in hand. When you get that, you want to make sure that you have a long enough lease to amortize the debt and make yourself very happy with the rate of return on your investment.

Folks, I wish you a lot of luck. Stay out there, look for it. It’s a hunting game. You have to find the right one. Take the time to find the right business. This is what you’re going to be doing for your living. You don’t want to rush into it. You don’t want to buy the wrong business. You always want to buy the right one.

Remember, always hire professionals that you can work with, that you like, that you understand, and work with them to make sure that you’re doing the right transaction.

Let us know if we can help you find the business of your dreams. We have approximately 4,000 opportunities that we currently represent. We’d love to hear from you. Give us a call today at (877) 735-5224 to speak to one of our experienced business brokers.