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valuing a business

how is a value of a business determined

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Answers (7)
Gerald Kong
Trinity Transaction Advisory, LLC
Premium Broker

It depends on the assignment and what you are valuing a business for. If it is for a sale, you need a valuation of limited scope fair market value. The company we have used for many years is: A valuation to sell a biz is worthless unless purchase justification modeling is performed. Theoritical models will have you all over the map.

Mar 24, 2011
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The BAF Group LLC

The VERY BEST part of all of this is: There ain't no simplistic way to do this!!!

Mar 21, 2011
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Cowboy Business Group
Business Broker
Utah County, UT

The tax advantages enable the business owner to expense cash flow items as described by other posts. The value, in my view, is also the years in business, goodwill, market share, brand, quality, and the potential growth opportunities remaining, or ways in which to further develop the business.

Mar 21, 2011
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Hello Ernest,

The previous answers offer sage advice. However, I would caution that the valuation of a business is not a science - as much as I hate to say this "it all depends". I encourage you to visit my blog: for some explicit and commonsensical advice about how to value a business. I hope it helps.

Good Luck!
Julie A. Barnes, CPA
President, SBX, Inc.

Mar 20, 2011
Steve Skrlac
Keystone Business Brokers Inc.
Business Brokerage Services in Ontario, Canada

I agree with Don. One qualifier I would add to Steve's answer is with respect to Owner's draws - I am assuming you are referring to shareholder draws that hit the balance sheet, then I would agree with you. Any discretionary personal expenses that hit the income statement should be normalized.

Mar 20, 2011
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The BAF Group LLC

The best part of Steve Sharp's answer has to do with the Owner's Salary. I cannot tell you how many Sellers (and Brokers) add back the entire amount, and do not deduct anything for the New Owner's Salary. Then, they are amazed when the SBA or Bank turns down a loan for the Buyer, because the Buyer's Pro Forma Projections do not adequately recognize such a deduction. In a small business, that can make an enormous difference.

However, Mr. Sharp's use of the "2 to 2.5 times net profit" estimate is something I would disagree with, in part That may work for SOME businesses, (and in his defense, he did say, "Most businesses...") but there are others where the multiples can be much higher or lower, depending upon the market and the industry. And if you are in a cash business like a restaurant, you may use a "rule of thumb" that depends on Gross Revenue, rather than Profit.

Market value of FF&E and Equipment is also sometimes added in separately, where in other industries you will find that these tangible assets are assimilated into the overal Price, which may have been computed on the basis of that multiple of Profit - assuming you use such a multiple. Even in Motels, which include not only huge amounts of FF&E, but Real Estate as well, many sophisticated Buyers will use a multiple of Revenue to determine Price. And the multiples can go from 2 to 6.

We only use mutiples for the most gross kinds of estimates. For really nailing a better defined Price, we would analyze EBITDA and Debt Service, in combination with comparisons in the marketplace.

Short answer: It depends on the industry and frequently, the size of the business.

Mar 14, 2011
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Sharp Business Opportunities
San Diego County, CA

Most business value is determined by net profit. Usually around 2 to 2.5 times net profit plus market value of fixtures and equipment plus inventory but it is adjusted net which means you have to consider the following - The following are standard items when figuring the Adjusted Net Profit:

Depreciation – add back

Interest Payments – add back

Loan Payments – add back

One Time Expenses – add back

Owners Salary – add back (then figure how much to replace owner)

Owner Draws – NOT an add back

Also any personal expenses that are not necessary to run the business need to be added back such as car, gas, and cell phone, home office, extra’s from costo, etcetera.

There is more information on my website blog page 'Getting To The Bottom Line'

Mar 13, 2011