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Small_Business_Valuation_Primer
| Small Business Valuation Primer
For simplicity's sake, this article will assume that the buyer
will be acquiring a single business with possibly more than one
location (for example a small Laundromat business with two
locations). In addition, we will not be covering valuation
techniques for businesses where more than one product line or
service will be acquired. For the purpose of this discussion, we
will assume the simplest of all cases. For example if a buyer is
acquiring a retail business, that business will be assumed to
sell one type of product (for example, children's clothing).
This book is also assuming that its reader will be buying, or
intends to buy, a small business that is privately held and
valued at $1MM or less. Finally, we will be focusing on valuing
a business that is not going to be turned around, but will
continue to operate (or grow) as purchased, under the new owner.
A business that is failing and in need of an experienced buyer
to re-structure and turn it around, or fix it, has to be valued
using a different set of valuation metrics. Note that even
though there are many ways to value a business, to keep things
simple, and in light of its audience, this book will be using a
straight forward multiple of earnings (net income) method to
help a buyer arrive at a value that is as close as possible to
the intrinsic value of the business. But keep in mind that in
the end a business' value is equal to what a buyer is willing to
pay and a seller willing to accept. To analyze a business, we
begin by collecting and reorganizing its accounting and
financial statements. Below is a list of essential documents
that need to be gathered and analyzed. To make this analysis
worthwhile, financials statements for at least the past three
years must be available, preferably on a monthly basis. We
recommend buying a business that has been operating (and has
been profitable) for at least three full years: Valuation
Document Collection
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