Rule of thumb or commonly-accepted industry income multiples are probably the most common way to value a small or micro-sized business.  Valuation as you may already know is a delicate art, and one that will rarely yield identical results, especially when there are opposing interests as there are with buyers and sellers.  Often buyers will establish a Rate of Return that they'd like to see from an enterprise, taking into consideration the size and the type of business that they're entering.  Usually, there is an industry multiple common to sales of certain types of businesses, and these multiples usually are small, maybe 3 times the income of the business.  Higher growth companies such as high-tech businesses that have potential to grow organically without significant reinvestment of income or capital into depreciable assets receive higher multiples while more asset-intensive businesses typically receive lower multiples.  Of course, this is just a generality.  Businesses with higher risk, such as service businesses that have non-transferable assets like handshake deals between the current owner and his suppliers or vendors, may demand a lower multiple.

If you've decided that you'd like to take the plunge and purchase a business for sale, there are a few things that you should remember.  To quote an oft-quoted fictional figure “the most valuable commodity I know of is information.”  Due diligence is your responsibility as the buyer.  It is your responsibility to gather as much information about the business as you can.  We do not advocate doing anything illegal on this site, but we do recommend that a buyer has the obligation to be as creative and crafty as he can be to get the true picture of the business before buying.  It is sometimes more difficult to "fudge" the numbers on a medium-large business given that there are certain expectations of a transaction that buyers have going into the deal.  The chief of these is that everyone involved in the deal is a consummate professional, qualified, and relatively trustworthy.  When this is the case, it is expected that financial documents and statements are handled by professional accountants who use the appropriate tools and governing standards to present an accurate reflection of the company.  There are also tax documents available, which the buyer should certainly ask for in order to reassure itself that the numbers in the financial statements were the ones that were reported to the most fearsome government entity in the US, the IRS.  Ideally with medium to large businesses the size of the transaction merits an independent audit of the company financials and other records which both parties should agree to.  All of these things help shed light on the true state of the business.

Ben Stein likes to describe the stock market investment as the purchase of future cash flows. For company valuation, and thus stock valuation, often the experts employ variations of discounted cash flow valuation methods. Discounted cash flow calculations and highly detailed models often have to account for growth in the business, capital structure, capital efficiency, cost of equity and debt, interest rates, future currency inflation as well as any number of other risk factors. It has been suggested that growth rate and interest rate projections impact the valuation the most. This being the case, there are a number of relatively minor inputs that can truly move the valuation in one direction or the other, thus this type of valuation can be highly subjective. This has become the most common method of pricing stocks for the value-type of investor who seeks to find companies whose value is not fairly reflected in the current share price, thus suggesting a good buy (ie. buying a valuable asset for less than what most people currently value that asset, expecting the market to realize that it was wrong and begin directing capital to that asset). A good argument for using the cash flows of a company to find its true value is that it is more difficult to obfuscate the condition of a company with the cash flow values than it is with company earnings. Many of these problems are particular to large companies and companies that are part of the stock market and have to report their financial information to the public. Discounted Cash Flow or DCF is therefore often more complicated than necessary for valuing smaller and private businesses.
DCF can be expanded to analyze any capital investment. In general DCF models are calculating value using Net Present Value - compares future cash inflows to present cash outflow - and IRR – calculates the return rate on invested capital (ie. the yield).

In accounting terms, Book Value is also know as Net Book Value.  This can be
explained as the original acquisition cost of a company or asset minus
the depreciation, depletion, and amortization.

In terms of company valuation the Book Value can be the total assets of the company minus the intangible assets of a company, such as goodwill, and liabilities.  This could also be called the Balance Sheet Method of Valuation or Tangible Assets Method of Valuation.

What to ask yourself before investing in a franchise

The process of buying and selling businesses and assets is daunting for any investor, owner, or entrepreneur.
But it's especially daunting for the successful business person with a limited amount of time or
experience in these areas which prompted us to begin Bagora.com.

Commercial Real Estate Glossary

Foreclosure
The act by the mortgagee or trustee upon default, in the payment of interest or principal of a mortgage of enforcing payment of the debt by selling the underlying secured property.
Lease
A contract by which a tenant (the "lessee") takes possession of office space, furniture, equipment or other property for a specified rent and specified amount of time. At the end of a lease, the property reverts back to its owner (the "lessor").

Bagora is an brand new online searchable database of businesses for sale as well as a resource for locating commercial property for sale or for lease. We are seeking to become one of the best, most easily searchable online resources for the entrepreneur, investor, broker, and manager. We hope to make it easier and to look for information about running a business or acquiring/selling businesses or assets including commercial property.