The Simple Way to Value a Small Business 

Thank you very much!

Glad you found it useful! 20% is based on 5X earnings multiple. Since businesses fail at such a high rate you have to be compensated for that risk.

If I understood correctly, it means that if the business makes 1M in earnings at a 20% ROR, then its value would be 5M.

@@altar7885 I am also confused about how the two link together. A lower risk (better buy) at 12% would value the business less....

Glad to hear you enjoyed it!

Happy to help!

Yes, when assets are being sold with the business, their valuation is a critical factor in determining the overall value. In the case of the bakery owner selling due to illness, while reduced earnings impact the valuation based on income metrics like Net Income (NI) or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), the assets such as ovens and commercial mixers still hold tangible value. These assets would typically be assessed separately through methods like replacement cost or market value, and their inclusion can mitigate some of the risk associated with reduced earnings, potentially increasing the overall valuation of the business.

I appreciate your detailed response. That what I was thinking as well. Would you have additional resources you recommend looking at for business valuations? @@TGGAccountingSanDiego