Businesses are typically catagorized by size and growth potential. Main Street Businesses are typically businesses that sell for $1 Million or less. The Merger and Acquisition Market (M&A) is on the other end of the price sprectrum and typically represent businesses that sell for $10 Million or more. Between these two markets, as you would anticipate, we have Mid Market businesses.

Existing businesses exhibit a proven revenue and income stream, while businesses that have worthwhile concepts that have yet to be proven, are typically considered to be venture capital opportunities.

Main Street Businesses

Most small businesses are purchased based on a multiple of Discretionary Cash Flow (Best thought of as the pre-tax total economic benefit to the owner). This rarely shows as Net Profit because of the owner's desire to minimize taxes. It is typically calculated by taking the Net Profit (or loss) and adding back (thus the term add-backs) the following:

-Officer's Salary
-Interest
-Depreciation/Amortization
-Non-recurring Expenses
-Expenses not required for the operation of the business

Usually, the owner's Discretionary Cash flow ranges between 10% and 20% of the total sales of the business. Please keep in mind this is a rule of thumb and there are exceptions. Service businesses, for example, can easily have a discretionary cash flow equal to 20% to 50% of the annual sales.

Experience has shown that the majority of Main Street businesses sell for 2.5 to 3.0 times the owner's Discretionary Cash Flow. Again there are exceptions to this in either direction. A very desirable business could easily sell for more, while a lower asset, easy to duplicate business that has not established a brand name or loyal clientele may sell for as low as 1.0 to 1.5 times Discretionary Cash Flow.

If Small Business Administration (SBA) financing is obtained, a Buyer can anticipate a 20% down payment (of the total package purchase price/closing costs/working capital (sometimes working capital is borrowed as well)) and the balance is amortized over 10 years at prime plus 2.0% to 2.5% (at a variable interest rate). A down side to SBA financing however, is that it typically adds approximately 45 to 60 days to the entire process.

If the Seller finances the transaction, the down payment typically ranges from 25% to 50%. The terms of the Seller carried portion of the purchase price are fully negotiable.

Training and transition is typically conducted over 30 days at no additional cost to the buyer. Again, like everything above this could vary considerably.

Mid-Market, M&A and Venture Capital Transactions

As the size of a business increases, other methods of valuation are typically utilized. These may include Excess Earnings Method, Discounted Economic Income Method, Industry Specific Multipliers, etc.. These methods can be utilized for Main Street transactions, but are more commonly appropriate for Mid-Market, M&A and Venture Capital Transactions.

Exit Planning and Terminal Value- Buy a business, you own a valuable asset!

There is one additional value in purchasing a business that must not be overlooked. The Terminal Value of a business is the value or net sales price for the business realized at a future time when the business is sold. A person, who has purchased a business, runs it successfully and paid off any notes associated with purchasing the business, now has a valuable asset that will convert to cash upon its sale. This value needs to be included in the calculation of the total return on investment (ROI) analysis of the business and any consideration in purchasing the business. One common method used to do this is to calculate the return on investment of the down payment used to purchase the business as a function of the future sales price of that business.

Finally, it should be noted that the price/value of a business is only one component of the overall reasoning to purchase a business. Other components may have greater or equal weighting and include the overall deal structure, the general life style the business affords the owner, the stability of the business, the reputation the business enjoys in the community, etc.

These notes are set forth as general guidelines. As you can see, however, they each have exceptions. This is no guarantee as to how a transaction will proceed. It is simply an outline as to what is typical in the world of business acquisitions.

Many of these same considerations apply to purchasing an existing franchise. Click here For more about purchasing a proven, reputable franchsie.

Independent, 3rd Party Business Apprasials

How Much Is A Business Really Worth?

If this is a question you cannot accurately answer with confidence, you should consider our Business Valuation Services. Sunbelt Business Advisors - Birmingham can provide comprehensive, independent, certified professional appraisal services for business sales or acquisitions; asset alloctions; loan valuation determinations; buy-sell agreements between owners; condemnation proceedings; domestic settlements; estate or inheritance tax purposes.

To contact Sunbelt Business Advisors - Birmingham for more information on independent valuations, Click Here