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hello my name is Bill Rowland I help small business owners sell their companies before I get started I need to say I'm not an attorney or an accountant I don't get financial or legal advice and this is an informational video only let me add every company will be different and the numbers in this example are made up in a real life scenario there are many more facets and moving parts to evaluating a business than what will be in the short video what I'm going to go over is a fictitious simplified version of how small businesses are valued if we can start on the top line you can see this imaginary business made one million dollars in sales last year I would like to add a caveat to this some business owners think if their company made a million dollars last year it should sell for a million dollars now the company may or may not sell for a million dollars but first bankers accountants financial institutions lawyers and buyers want to see the evidence and the real numbers that support a one million dollar asking price on this next line down is cost of goods sold this company paid 375 thousand dollars for cost of goods last year your cost of goods are things like raw materials and labor costs for workers producing the product also the factories overhead in storage the next line down is operating expenses 525 000 last year some of the operating expenses are rents utilities wages salaries accountants legal fees selling management expenses and others so on the next line down after we deduct 375 for the cost of goods sold and the 525 for operating expenses we end up with a net income of one hundred thousand dollars for this business last year on the next line down where it reads current profit one hundred thousand dollars is our starting number for what this business might sell for it is a real viable number that comes off the taxes of this company so once we add to one hundred thousand dollar profit we include the first basic add back which is on this line that reads interest taxes depreciation and amortization fifty thousand dollars if we take the average for a company making one million a year that's a fifty thousand dollar add-on next line is Furniture fixtures and equipment rff and E depending on the level of technology and sophistication of the company a company could easily have two to three hundred thousand dollars or more in FF e so we add that also to the asking price of this company I need to add a caveat for FF e there are two schools of thought the conservative thought is lending institutions they don't like to add FF and E into the price of the sale even after depreciation the reason for this is most banks think that buyers might inflate the numbers yet the business broker would overwhelming evidence insist after depreciation FF and E should be added to the sales price simply because of new owner would have to replace all those items the next line down is inventory now the company's inventory might be paid off it might be worth anywhere from five to fifty thousand or more so inventory also needs to be added to the asking price for this business next line down is non-recurring income expenses or a one-time chargebacks this is added to the Askew price because a new owner will not have these costs in the future these costs are things like a fire a theft litigation a new roof new furnace or air conditioning which needs to be replaced so let's say this owner had a ten thousand dollar roof he had to replace this year the ten thousand dollars would be added to the asking price the next line down is discretionary earnings are sellers discretionary earnings discretionary earnings are owner's benefit are things such as owner's salary owner's share of payroll taxes owners share a pension Auto expenses auto insurance life insurance health insurance cell phones unnecessary family members on the payroll entertainment vacations and a number of other things once again for a business making a million a year this company would probably have forty thousand dollars in discretionary earnings so this forty thousand would also be added to the asking price for this business the last line on this chart is something called multiples multiples takes into consideration things like Goodwill contracts business name employees and a number of other things and most small businesses the multiple will be two to three times the profit for that year which two times one hundred thousand is two hundred thousand there is also a thing called risk that affects the price of the business since we don't have information on this imaginary business we're going to skip the risk so in order to find our asking price of this business what we've done is on this new board you're going to see we got one hundred thousand dollar profit fifty thousand add-on two hundred fifty thousand ffne 25 000 inventory ten thousand add-on for the roof forty thousand dollar owner discretionary spending two hundred thousand multiple times two so our asking price for this business is six hundred and seventy five thousand dollars not always but when selling a business A good rule of thumb is the business will probably sell for about sixty percent of your total sales once again this is a fictional business and these are fictional numbers every company is going to be different thank you very much for listening to video