Understanding the business for sale value is often overlooked by business buyers. GUESS WHAT: "It's what the owner wants" IS NOT a viable explanation from business brokers to how their businesses for sale are priced. Ask the business broker or seller for a detailed explanation of how it was priced. If business brokers or sellers decline your request on their businesses for sale THEN GET AWAY!

Too many business brokers do not do ANY due diligence in pricing their businesses for sale and most sellers do not have any concept on pricing a business to sell. IN ADDITION, "my accountant told me" is also not a valid reason because an accountant places a hard value on a business NOT a market value as is needed when selling a business.

There are many models used by business brokers in placing a market value on businesses for sale. In some form of the analysis, a cash flow (true profit) and true gross sales figure needs to be determined. If real estate is involved, it should be added in as a separate figure 

The following independent pricing models are widely used by business brokers and accepted throughout the industry - it is also easily verified (not including real estate)...

• Cash Flow x Industry Multiplier usually 2 - 4 ( cash flow is the bottom line + all unnecessary expenses added back into the bottom line) depending on industry and growth.
• Cash Flow x 1 -  3 + all equipment and inventory (depends on industry & growth)
• 70-100% of gross sales for retail or manufacturing related businesses (depends on cash flow)
• 60-80% of gross sales for food related businesses (depends on cash flow)
• 30-60% of gross sales for service related businesses (depends on cash flow)

Look past gross sales multipliers as they can be misleading

If you encounter a detailed and confusing market value formula from business brokers or sellers then we suggest stepping back because an old ploy by some business brokers is to complicate a formula to where a buyer gives up and trusts the business broker or seller. If a business broker can't give you the cash flow and gross sales values then move on.

Too many business buyers concentrate on gross sales without proper knowledge of the basic operating expenses to profit on businesses for sale (cash flow). Cash flow is the true profit of the business and you should demand that the business broker show you the cash flow and how it was derived from the tax returns and/or other financial statements.

Cash Flow - not gross sales - determines the profitability of the business.

What is Cash Flow?

Cash flow is profit before taxes. It is what the owner is truly making. Cash Flow is determined by taking the Net Profit or Loss from the tax returns then "adding back" to the Net Profit or Loss any non-essential, non-business related or paper expenses (amortization, depreciation and interest). There are additional "add backs" like one-time expenses or payroll expenses on an employee no longer with the business - just to name a couple.