Got a call from a specialty business broker today who wanted assistance in obtaining a loan on an online business. I had the broker fax me the tax returns and on the returns the business had increasing revenues for the past three years, however the adjusted net income averaged over the last three years amountd to $125,000.
The selling price of the business is $600,000. I asked her how they arrived at the selling price and she replied, "this is a multiple of 3 on the last 12 months trailing on the financials".
No wonder only 30% of all businesses are sold when they go on the market! Businesses usually sell on previous earnings, NOT on the last 12 months adjusted net earnings or based on future revenues (potential - I hate that word!).
Just so you know if you are getting financing to buy a business
lenders usually look at the PAST three years of tax returns average them and sometimes put more weight on the last complete year. In this case this business is really "worth" only $375,000 in the eye of the most lending institutions.
Bottomline: Most lenders look at adjusted net income and the price of a business very differently that most business brokers, agents, and small business owners.
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