Valuations for Buying a Small Business- An Example

So once you have the knowledge necessary to perform an initial valuation on a small business you're looking to buy, what do you do with it? Let's go over an example.

Here is a typical example on valuations for buying a small business. PLEASE BE AWARE that this is very simplified and I go over it and many more tricks of the trade in the full ebook and the toolkit:

A deli business is on the market for $300,000 and it was attractive enough for you to get to the point of coming up with an appraisal price range. The owner's discretionary cash flow (ODCF) is $135,000.

You perform your valuation using a rule of thumb ODCF multiplier of 2 (this is just an example multiplier and may not be accurate currently for this type of business).

The price seems to make sense at a max of $270,000. Let’s say you determined there are factors in your research that lower the value of the business such as the need to replace some of the equipment at $10,000.

Now you think a max offer of $260,000 would make more sense. In this case, you decide that a low end of $245,000 is not out of the question and is a good starting point.



Now What Do You Do with Your Offer Range?

Well, now you have a reasonable offer with your valid reasons behind it.

Theoretically, you have come up with an offer range you can live with and it makes sense, so go for it. The seller just might take it. If the seller balks all the way up to the top of your range, then you move on.

The decision by the seller will tell you if he/she is unreasonable or not and if they are someone you don’t want to deal with anyway. Maybe the seller's mind will change before you find another suitable deal. Or maybe he will come up with a counter offer.

You will never know if you don’t put it out there. Don’t make assumptions.



Best of luck in your business buying success-

The Business Buying Guru