Basic Truths about business valuations:
1. Purpose of business valuation is to determine a PRICE RANGE, not a specific number.
2. The earnings of your company should be the basis of the valuation. The buyer buys your company for one reason only, that is, for its earnings.
3. For small businesses, using the multiples of earnings is the common method of valuation.
The earning use in small business valuations is OWNER'S BENEFIT. It is suggested that past 3 years Owner's Benefit be used.
= Annual Pretax Profit
+ Owner's salary + Owner's perks/benefits
+ interest + depreciation.
(Contrast with: EBITDA = Earnings before interest, taxes, depreciation and amortization)
When you are selling your small business, you can hope for a higher multiple of earnings when:
1. Your business is in a growing trend.
2. You are able to provide your own finance to the buyer to purchase your business.