Pricing A Business Detail


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Pricing A Business Detail

  1. 1. Pricing A Business Jeff Goldblatt – Business Intermediary VR Business Brokers
  2. 2. Overview <ul><li>The Business Valuation provided by VR is a complex one whose goal is to determine the most likely selling price of the business. We utilize current databases that provide the selling history of like businesses. The marketplace ultimately determines the selling price of the business. </li></ul><ul><li>A properly priced business will sell more quickly than an overpriced one. </li></ul><ul><li>While there are many different methods to pricing a business, the most popular method is the Sellers Discretionary Earnings(SDE) method. </li></ul><ul><li>SDE requires recasting the profit & loss statement so that the true earnings are exposed & understood. </li></ul>
  3. 3. Overview <ul><li>The SDE add backs are depreciation, owners salary & all nonrecurring & non-operating expenses. The total SDE is adjusted by the add backs to the earnings total. </li></ul><ul><li>Examples of add backs other than those listed above are: </li></ul><ul><li>1. Auto Expense - is the vehicle necessary to the business </li></ul><ul><li>2. T & E – is this a necessary expense to the business </li></ul><ul><li>3. Manager Salary – necessary to the owner/operator success? </li></ul><ul><li>4. Owner Focused Employee Benefits – is health insurance for the owners family listed as an expense? </li></ul><ul><li>5. Legal & Accounting – is this a non-recurring charge due to a law suit or one-time event. </li></ul>
  4. 4. Overview <ul><li>In addition to the SDE method, other components of the business may have an effect on the selling price. They are: </li></ul><ul><li>1. Fixtures & Equipment 2. Inventory </li></ul><ul><li>3. Goodwill 4. Lease </li></ul><ul><li>5. Leasehold improvements 6. Franchise </li></ul><ul><li>6. Patents/Copyrights 7. Secret Recipes </li></ul><ul><li>While the easiest way of valuing fixtures & equipment is through using the depreciated value of from the sellers financial information, the most realistic method is researching the replacement value. </li></ul><ul><li>The business broker needs to determine if the value of the assets is greater than the average base of value in similar sold businesses. </li></ul>
  5. 5. Overview <ul><li>When arriving at a selling multiple to use for pricing, market comparisons or benchmarking at the national & local level are used to set the base line. The factors listed below can impact the average multiplier. These factors are: </li></ul><ul><li>1. Number of years in business </li></ul><ul><li>2. Number of years in business under seller </li></ul><ul><li>3. Capital investment needed & terms offered by owner </li></ul><ul><li>4. Competition level </li></ul><ul><li>5. Risk in business </li></ul><ul><li>6. Revenue and profit trend of the business & industry </li></ul><ul><li>7. Location/Facilities </li></ul><ul><li>8. Ability for business to be duplicated </li></ul>
  6. 6. Overview <ul><li>9. Clean financial statements </li></ul><ul><li>10. Skill level of employees </li></ul><ul><li>11. Business dependency on owner </li></ul><ul><li>12. Training support offered by owner </li></ul><ul><li>13. Ability to relocate </li></ul><ul><li>14. Equipment replacement factors </li></ul><ul><li>15. Level of automation </li></ul><ul><li>16. Customer base addresses & historical records </li></ul><ul><li>17. Website – Ecommerce activity </li></ul><ul><li>18. Timeline expectancy of seller </li></ul>
  7. 7. Overview <ul><li>Another rule of thumb for valuing a business is looking at the percentage of sales that other like businesses realized when they sold. </li></ul><ul><li>When reviewing the multiple and percentage of sales factor, it is important to view it from the averages in a low-mid-high format. </li></ul><ul><li>While it is important to arrive at a fair selling price, ultimately the seller hires the broker to market & sell their business. </li></ul>