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    4 Replies Latest reply on Oct 4, 2009 8:18 AM by phanio

    How do I calculate the right price for a Business?

    vickys Newbie

      Hi,

       


      I am looking into buying a franchised coffee shop. The seller has provided me the expense and revenue data in a spreadsheet format and tax return. Based on (Revenue - Expense), I have calculated Net before Tax. Is there any formula for calculating the price based on the Net Income? I checked locally with some accounting firms, but none of them actually do the valuation. There are some companies who do this type of work, but they are quite expensive since majority of their clients are large businesses and are in legal disputes. Any help is greatly appreciated.

       


      Thanks

       

      Vicky
        • Re: How do I calculate the right price for a Business?
          LUCKIEST Guide
          How do I calculate the right price for a Business, Welcome Vicky

          If I was looking into purchasing a business, I would talk to MY accountant, My lawyer and SCORE.

          SCORE is FREE and can help online.

          Good luck, LUCKIEST
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          • Re: How do I calculate the right price for a Business?
            phanio Pioneer
            There are several ways to value a business - some formal - some not so formal.

            The most prominate formal one is discounting cash flow - where you create a capital budget and discount those cash flows based on a weighted average cost of capital - but there are easier ways.

            One quick way is to take a multiple of EBITDA (Earnings before interest, taxes, depreciation and amortization). Essentially take the operating profit from the statements you were given and apply a multiple to that amount. Let's say that business such as you are trying to buy usually sale for a multiple of 2.5X EBITDA. Then, take the EBITDA number from last years income statement (this number is operating profit - essentially the profit for the business before it pays interest or taxes. The question then becomes how do you find the right multiple? You can try to find other similar businesses that have sold and cacluate their multiple or you can research multiples online or lastly, call several business brokers and see if they will provide you industry multiples (if they know them). You say this is a franchised coffeee shop - thus, there must be other ones that sold - others that you could contact and ask them the price they paid and what the prior years EBITDA was. (this may be your best source of information.)

            Another way is to see how long it will take for the business to pay back the sales price. Let's say that the business has net income of $25K per year and the sales price is $100K - that means the business will pay itself back in 4 years. (simple numbers here just to make a point) - Then YOU have to decide if that pay back is OK for you as the true value of anything - including a business - is what someone is willing to pay for it. If this business provides you with the lifestyle you want financially and you are happy doing it - then the price you are comfortable paying is the right price - just make sure you can afford the business and your lifestyle together.

            Laslty, also look at the past years in tandem - is the business growing - has net income improved year over year? Also what do you plan to do with the business - will that increase revenue or reduce cost or both. If so, then try to calculate the business's financial statements based on that and use those numbers for your valuation.

            SCORE is a good organization - also look into a local SBDC - they may be able to help you research a multiple or better understand the financials.

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