North Florida Business Brokers

What should I pay for a business?

Some people expect to find a terrific business (high profits, low risk, great potential, easy to run, no problems, etc.). If such a business existed most people would not be able to afford it, the price would be so high, and they would be competing with well financed industry professionals and corporate buyers to purchase the business.

Some buyers look for very cheap businesses with little or no cash outlay and expect to earn a good income the first year. It is a very rare situation when a business can be purchased under these conditions. More often low prices & cash down, buys closed or failing businesses. These businesses are very risky and may involve significant additional investment to make them profitable. They are usually best left to industry professionals or corporate buyers who can afford the cost and the risk. The key is to look for a business that is established but has some problems you can solve or from which you build on. That way, the business will be affordable, and you can take all the profit from the improvements you make.

METHODS FOR PRICING A BUSINESS? There is no one right way of pricing a business. There is no magic formula that is always right, however, the most commonly used are:

2 to 3 times annual cash flow, (or owner's benefit) but can vary widely depending on the desirability of the business. The lower the risk, the higher the multiple can be.
The market value (not depreciated book value) of hard assets of the business such as, furniture, fixtures, equipment, franchise agreements, real estate, inventory etc. plus one year's cash flow.
3 to 12 months gross sales, depending on type of business.

Price is nearly always related to the owner's benefit and can vary drastically depending on the terms agreed upon and the desirability of the business. Obviously if a business shows consistent growth over a number of years, is relatively easy to learn, has good hours and a trained staff, the price will be higher than one that is flat or sales are going down, revenues are sporadic, 1 or 2 customers account for 25% or more of the business etc.

WHAT'S THE RIGHT PRICE? The monetary investment you have in the business is the down payment. After that, the business pays for itself out of its cash flow. So, If you can buy a business for the amount you have for a down payment and the business makes the debt payments and you still earn the desired profit then, the business is worth the price.

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