San Francisco Bay Area :: Business Sales, Valuations, and Advisory Services for Privately Held Companies

Buying a Business FAQ

What is a business worth?

The value of a business depends on the needs and perspectives of each individual Buyer.  Value is related to risk and the ability of the business to generate and income stream that is comfortable for the Buyer.

Start with the basics:

• Review the tangible assets (FF&E)
• Recast (or normalize), confirm, and review Sellers Discretionary Earnings (SDE)
• Review factors that can impact future earnings
• Review valuation approaches with your ABI Intermediary
• Perform an investment analysis to determine net cash flow after debt service

There are three basic valuation methods:

1. Asset Approach: Fair Market Value of the assets of the business
2. Income Approach: A multiple of earnings based on Sellers Discretionary Earnings
3. Market Approach: Commonly referred to as Comparable Sales Approach.  Historically, what have similar type businesses sold for?

In many cases there are some common averages:

• Two to Four times annual Sellers Discretionary Earnings
• Fair Market Value (FMV) of Furniture, Fixtures, and Equipment (FF&E) and inventory plus one year’s Seller’s Discretionary Earnings

A one-size-fits-all valuation method does not exist.  Each business will be valued differently because each business (and every Buyer) is so different.  Further, different appraisers will often come up with a wide range of values for the same opportunity.  Value is definitely in the eye of the beholder.

Regardless, the final price must make financial sense:

• Must cover debt service
• Must provide a reasonable income for the Buyer
• Must provide a reasonable Return on Investment (ROI) for the Buyer
• Must allow for working capital fluctuations

While ABI assists the Seller in finding the best method to price a business, the final price and terms is determined by the Seller.  Conversely, while ABI assists the Buyer in calculating a range of values for a business, the offer amount rests solely with the Buyer.

Do you have additional questions that are not answered here?  If so, please send us a note so we can add it.