More detail on valuation...

DETERMINE ASSET VALUE


How much are the assets worth?  If you add equipment, accounts receivable, and inventory what would that total up to?  Cash in the bank does not count - the owner keeps that when the transaction closes - but anything else in the business that has an actual monetary value associated with it will impact the value of the business.  How can it not?  Cash Flow is the most important thing, but the Asset Value of a business plays a strong supporting role in determining what a buyer will actually pay.


THEN ASK THE HARD QUESTION


What would a willing buyer, on the open market, pay for the tangible assets of the business, and all future cash flows with the expectation that the cash flow will not be adversely affected by the removal of the previous owner from the business?  The cold hard truth is that buyers will almost always pay between 2x and 3x cash flow.  This is based on my conversations with thousands and thousands of buyers and more importantly...what kind of checks buyers are willing to write.



More detail on valuation...

DETERMINE CASH FLOW


What is the sum total of all financial benefit that the owner receives as compensation for owning and running the business?  Be sure to add the net profit, owner's salary, non-cash expenses like depreciation, and other perks like owner's health insurance or car allowance.  Another way of saying it is anything the business pays you or pays for you.


This total is referred to as Discretionary Owner's Cash Flow - usually we just call it Cash Flow.  It's an important number.  It's the number that will drive an offer far more than anything else.  It's really not that hard.  The more money you made, the better an offer will be.