Like any other product, a business is worth whatever a willing buyer will pay a seller in a free market. However, the value of most businesses is usually related to cash flow and varies with the financing terms agreed upon. Price will also depend on the type of business, the value of the assets, general attractiveness of the business, and future potential, among other factors. Typically the price will be approximately 2 to 3 times the annual cash flow of the business after recasting, with a 25 to 50 percent down payment and a note paid off over 5 to 10 years. If the business can earn the income you want and service the note payments, then it is worth the price.
Goodwill is the difference between the total value of a business and the value of inventory, equipment and other “hard” assets. The amount to pay for goodwill depends on the cash flow of the business and its general attractiveness.
Discretionary earnings are usually defined as profit before income tax, depreciation, interest and owner’s compensation and other owner benefits. Discretionary Earnings is the amount of money the owner has available to pay himself, to invest in additional equipment, to make the note payments on the business and pay taxes.
Usually, you can take a tax deduction for depreciation on the fair market value of all furniture, fixtures, and equipment at a much faster rate than real estate. The Covenant Not To Compete and the value of training are tax deductible, frequently at high levels. Finally, most businesses have deductible expenses that add to the owner’s cash flow. Always discuss tax issues with a qualified tax professional.
Government surveys show that over 80% of new businesses fail in the first 3 years, for reasons such as poor location, low product quality, under capitalization, and lack of management skills. This risk can be eliminated by purchasing a quality business with a proven cash flow.
Presenting opportunities for your review allows you to consider situations that you would have an interest and match your own personal acquisition criteria. Using an Intermediary also allows for confidentiality during the initial stages of the buying process. Allowing a professional to lead you through the steps to buying a business will ultimately give you the peace of mind that your interests were protected and your investment well directed. Choosing an individual who is professionally trained, has made a full-time commitment to their career, has access to the largest database on comparable business sales in the world and can be trusted to work for your best interest means you have chosen a VR Business Intermediary to work with you.