Valuing a business is an intricate science based on hundreds of factors. It should come as no surprise that professional business valuations for large companies sometimes run to millions of dollars. This has created a slew of competing systems for predicting the market value of a business.
That being said, there is an easy way to quickly figure out the worth of a small business. Multiples based on gross profit have been figured out for almost every type of small business. Whether you are looking to buy a golf course or a grocery store, a rug shop or a railroad, you can be sure that a quick rule thumb multiplier exists for you.
Gross profit multipliers work like this: say you want to buy a hair salon. You have found out that the simple GP multiplier is 5. You have discovered that the gross profit of the salon you want to buy is (for simplicities sake), $100,000 a year. Take the Gross Profit, multiply it by the multiplier, and you have a fair estimate of the worth of the company—in this case $500,000.
Remember that gross profit is the measure of a company’s revenue after the subtraction of direct costs. If you have subtracted other fixed price overhead items (such as "non per-item-fixed” salaries), then you have probably come to a net worth that is too low.
Remember that gross profit multipliers represent a very inaccurate way to value a company. Multipliers ignore any specifics relating to the company you wish to buy, including inventory, location, and many other highly tangible extras that will drive up the price of the business.
Once you have used these rough estimate gross profit multipliers, you may be able to weed out a number of businesses from your short list. At this point, however, there is no excuse for being cheap or lazy when it comes to getting a valuation.
Hire a business model valuation professional who is familiar with more complex P/E and DCF valuations, and who is capable of fully analyzing the complete stream of revenue and the assets of the given company. Never go to the bargaining table with nothing but a GP multiplied guesstimate of a business’s worth.
Of course, if you are looking to sell your business, you can also use these same gross profit multipliers to get a feel for what your business will sell for, approximately, on the market. Again, these rule of thumb estimates are no replacement for an honest professional appraisal.
© Peter Siegel, MBA - All Rights Reserved
www.USABizMart.com
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About The Author: Peter Siegel, MBA is the Founder & Principal of USABizMart.com - USA Businesses For Sale, one of the most popular business for sale related websites on the internet. He is also the author of three books on the topic of business sales and how to buy a business. The most current book is "Businesses For Sale - How To Buy Or Sell A Small Business". Mr. Siegel also writes a daily Business Opportunities Blog – at www.USABizMart.com/blog that covers all topics on selling, buying, valuing, and financing small to mid-sized businesses.
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