This article are provided for information purposes only, and are not intended as legal advice.


How to value a business for sale? Part II

September 24th, 2008

There are various methods of valuing a business, discounted cashflow for larger companies but many people use multiples of normalized earnings for valuing smaller businesses.  Normalized earnings is net income per the financial statements, add back all personal expenses which are included in the financial statements and normalize the owners salary.  What is the salary that a third party would be paid to do what the owner is doing.  If the owner is drawing $10,000 a year in salary but a third party would be paid $75,000 to do the same job, you have to decrease the normalized earnings of the company.  Conversely, if the owner is paid $200,000 but could be replaced by paying someone $75,000, then you increase normalized earnings by the difference.

 

The multiple of earnings depends on the company – is it a manufacturing company – the multiple is always higher because you actually own assets and the products sold are proprietory.  If you are a distributor, you only have goodwill because all the products you sell are manufactured by third parties and if you could lose the distributorship at any time.  If you are a retail store, people will pay a higher multiple if you are a franchise vs an independent. 


Filed under: valuation of a business — Gary Landa @ 5:03 pm


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