Initial Valuations for Buying a Business- What Information Do I Need?

When you conducted your review of the business while in the Finding a Business stage, you gathered enough information to at least perform preliminary appraisals for buying a business.

Ultimately, 3 years worth of Profit & Loss (P&L) reports would be ideal, but that will be rare at this stage. If you happened to get it during your initial review of the business, that's great. But if not, a general P&L from the previous year or the last 12 months will do. This is the typical information you will get from a business profile that goes along with the business listing.

Further information from the review that will be of use are things such as:

•how long the business has been operating,
•how long the current owner has been operating the business,
•how important the seller is to the business,
•how difficult it is to enter this type of business,
•is there a lot of competition in the area,
•are customers often repeat/contract based or one shot deals,
•are hard assets (equipment) in good working order,
•what reasons are the owner selling for, etc.

Now all you need to do is to find the proper mulipliers to do the initial valuation.

I recommend using the rules of thumb that involve owner discretionary cash flow (ODCF) multipliers. They are the most accurate value indicators for most, but not all, small businesses and provide different multipliers for different industries.

In general the multipliers will be in the range of 1.75 to 3.5 times the ODCF. Most won't be less but some can be more depending on the industry and other positive factors such as location, time in business and so on.

This will at least get you an idea of what the business is really worth. I would recommend getting help with this as it is a very important piece to the puzzle. You can find do it yourself resources here or get some consulting help here.


Best of luck in your business buying success-

The Business Buying Guru