Julie is sooooooo correct. This, in part, is what I hate about the "quick and dirty" rules of thumb. Regardless of whether you use a rule of thumb or a cash flow ratio, you ALWAYS have to double-check the price you come up with by doing exactly what she says: Do a Debt Service estimate and back that out from your pro forma P&L or the Seller's historical Financials, to see where you would come out, as a Buyer.

Web reference: www.bafgroup.com

Hello S Hackett,
You're going to hate this: It all depends. I believe the most commonsensical way to price a business is to put yourself in the buyer's shoes. Most likely, a buyer will be borrowing some, if not all of the funds. What you want to do is to work backwards. That is, if a buyer takes out an SBA loan, for example, how much cash flow can he/she expect after servicing that loan? Will that amount be sufficient for working capital and a decent salary?
I encourage to visit my website: http:// www.AustinBusinessesForSaleBlog.com for some other free advice on how to valuate a business. Please feel free to contact me or to post any questions on my blog.
Thanks!
Julie A. Barnes
President, SBX Inc.
512.577.8003

Web reference: www.SmallBusinessExchange.net