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years ago I was involved in the sale of a business that I started and that was way back before the miracle of YouTube when anybody could go on to the to the channel and find some video on how to to value a business but again I didn't have that luxury back then so what I did is I went out like a lot of people did and I went out got myself a business attorney talked to him asked him to represent me we wanted to the negotiation and I remember sitting there there was a kind of an intense negotiation that I remember sitting there thinking you know what this isn't going the way I wanted to but I mean on the knowledge of the attorney I believed that what he was telling me was correct we went ahead and finally after some intense negotiation we finally arrived at a price and bam lo and behold I walked out of that meeting and I thought you know this just isn't right this number it's not right but you know what I'm gonna go with what the attorneys recommending and and here Sonne afterwards I realized I found out that I sold that business for less than its real value and you know what I do to myself I promised I would never let that happen again so what I did is since that time I have spent quite a lot of hours learning how to price a business learning how to value of business learning how to do negotiation in a way that was gonna benefit me and was gonna benefit my family so what I want to do now is share with you how to value a small business but before I do that I want to remind you that if you haven't already subscribe to our Channel please go ahead and do that all you've got to do there's a little button underneath the screen and if you click on that button that says subscribe you'll go ahead and you'll subscribe to our channel but there's a little bell next to it if you click on that little bell you'll get the latest updates they'll be delivered right to your inbox so without further ado I'm gonna go ahead and have scotty tune it up [Music] welcome back over 50 TV and what I did here is I have an example that I put on this whiteboard I have an example of a business and I thought I'd do this just basically as an illustration to give you an idea on pricing and how to price a business but before I go through this board here what I want to tell you is I'm gonna do this in two parts number one is I am gonna give you this example but then after I do this after I go through this example what I want to do is go over some key facts things that I know that you should know before you sit down with anyone to do a pricing or negotiation but really to get the true value of the business you're going to want to look at part 1 and part 2 so let's go ahead with part 1 here and what I did is I put together here a business now there's an Andreus bakery I don't know any injuries bakery but I did this just guys again just to illustrate I want to give you an idea on some pricing so let's go ahead and look at this Andrea's bakery does a million dollars a year in sales okay now a per million dollar she has operating expenses and operating expenses this is right off if you look at a cash return you're gonna see this information about unattach return but really it's basic information that it should be on just about any income statement so you've got here and yours baby she's got sales of a million dollars per year she has operating expenses of $400,000 and reading expenses really what that is is that includes things like rent then includes utilities and that it would include the salary for Andrea if she was taking out a salary night management and this in this example here yeah we're gonna say she's taken out of salary now from that again you subtract a 400,000 from the million and then you've got what we call the cost of goods sold and then the cost of goods sold that's the cost of the product that cost of making the product and that would include labor what you're paying somebody to help you or paying a few people to help you in this case with a million dollars in sales I would imagine she's got a few employees supplies and it also includes things like materials but you can go ahead again in a tip statement you can see more we're going to need your tax return you can see what kind of items are that they have that are listed on that statement there but you've got sales of a million you subtract a 900,000 her profit her net income but say her net income is $100,000 now some people would look at that and say and I worked with people I've actually worked with people and said Lou you know my business is worth a million and then I'm gonna do a multiple of that so I'm gonna sell it it's really worth two or three million dollars I'm always letting no no that's not how you value in business you really want to get done past well you won't even want to get down the net income and that's what we've done here so sales minus operating expenses money minus cost of goods sold is going to give you your net income of a hundred thousand dollars in this example know there is something else that's called bad backs and I listed that here and these are just a few of the add backs and what I'll do is I'll go ahead and I will tell you some of the other that's it you can that you can use or you should be aware of when you're looking at valuing a business but in this case I've listed depreciation amortization and I've listed interest on debt and then I've got the owners compensation through payroll when they're paid through payroll and that would be right back into the into the operating expenses but again you've got the net of a hundred thousand you're gonna add back to that amount and I put about fifty thousand dollars and these are arbitrary numbers again this is a an example here for you but you're taking your sales minus your expenses you're adding back to that some key categories and again I've got them down here and what's called brilliant financial pilots and if you've probably heard it it's called a Bettina epidemic oh I'm trying to say that properly but nepeta is interest is Katz's depreciation and amortization so it's earnings before these four items so that is what your abotu is so you're adding back these items now let me say this to you though okay so we're coming up with a value of the business and this is a value based on the sales for one year it's based on an evac expenses so if you add this amount back that business could be worth a hundred and fifty thousand dollars without the multiple and this is what we're going to be getting to in the second part here but again I'm looking at this for one year of a value for one year of a hundred and fifty thousand dollars now when you're looking at this amount here you're saying okay wait a minute you know at least I'm learned over time I've learned that there are going to be other ad Baxters things that aren't listed in here and let me give an example many business owners will put expenses of vary expenses into operating expenses they might even do something into cost of goods sold but what they'll do is I'll put in here an example would be entertainment expense say they bought a boat and in boat there's they're using that for entertainment expenses so they're going to subtract what they pay for that boat and a monthly basis or however they decide to you two do that but they're gonna put subtract or add into that operating expenses are gonna add in what they're paying for the boat they could have a huge monthly insurance bill because the health insurance but because they have a particular illness that means that their insurance premiums going to be higher so that can be also added in here so there are add backs that every addition to this that you've got to be aware of and when you have those add backs when you subtract them and you add them you hear that number could go up significantly again it could be a boat it could be health insurance it could be multiple cars maybe they put their wife's car and here are their husband's car a monthly monthly payment here those add backs always should be you should scrutinize the statement I recommend you look at the income statement but more important I look at the tax return because if I'm valuing a business I'm looking at that tax return and I'm seeing what they put in there what they have in their operating expenses and what they have in their cost of goods sold because I'm gonna be able to I want to want to pull those numbers out and add them down here so I come up with the true value of the business so this is basically just a quick summary I want to get you in the ballpark to understand what you're looking at now what I want to do now is I'm going to be talking about multiples and I'm gonna talk about things like risk as those are also factors whenever you're coming up with a price for a business [Music] okay we're gonna talk about some other things here we're gonna talk about multiples and we're going to talk about risk and then I want to stress to you that we're really talking netting and we're not talking sales so here's there we go we said that Andrews bakery was worth at least on an annualized basis she had a hundred and fifty thousand dollars in value for that business for the year and what I'm saying to you is this that there are something called multiples so you could take a hundred and fifty thousand dollars and you could say her business is worth a multiple of two so that business would be worth three hundred thousand if you took a multiple of three businesses worth four hundred and fifty thousand for multiple six hundred thousand of five multiple is 750 now a multiple usually on a small business what I find is your multiples are going to be around two to three so you get a two or three time multiple multiple really it's based on risk if you have a small business and you're doing under a million dollars in sales you may have a little bit more risk than if you have a business that's doing more than a million dollars and I'm gonna say that and that's not something that's gonna be etched in stone obviously but I want ya reason I'm saying is because a business who's doing a million dollars in sales user or more than a million usually it have some support system you have some employees you have a little bit of a machine who's generating that kind of a revenue so that's when I talk about risk may be a little bit lower risk and a higher multiple is because you have more of the Machine more longevity in the businesses what I'm also going to see when I'm making some assumptions here but again you've got multiples two three four or five and it's all based on risk you know I told you in the beginning of this video that that when I was sitting down negotiating the cells of a cell the business I remember that person I was negotiating with said to me he says well you know we don't know if this business is going to be around in a year - and I said well yeah but the business has had steady growth for the last few years and I don't mean small the little incremental growth of you know three to five percent I'm talking fifteen to twenty percent growth in that business so he went ahead and really looked at risk and use that as a way to try to to get the the value of the business down but multiples depending and they all depend on risk and that's what you want to look at so if you are talking about buying a business if you're looking at selling your business you want to consider the expenses that I listed into the sales and the expenses I've listed in the first part of this video but then again after that you're looking at multiple they're all I'm trying to do here is just get you in the ballpark you know if you're looking to sell a business or buy a business I want you to understand these like you understand the back of your hand but I also recommend that you find someone who you can talk to someone who has experience in buying and selling businesses talk to them it's gonna be worth the investment it'll be worth what you pay them it's gonna be worth it because they're gonna help you to get the true value of your business so that's about all I've got for you for today if you have any questions you can always make comments in the comment section here on our youtube channel but for now I want to thank you for watching the video and again if you haven't subscribed to our channel please go ahead and do that all you got to do is hit that little subscribe button and also if you add up little Bell you'll get our latest updates so this is Lou Reyes like over 50 TV I hope I've helped you and I hope you have a great day everybody