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Valuing a business for sale

What is a business worth? This is the single biggest question asked on BusinessesForSale.com.

The following general rule is usually a reliable barometer:

Around 80% of businesses are worth between three and eight times their profit

Please note, it’s only a general rule but it’s generally correct!

This does not include the property/real estate – so in the case of a restaurant with its own premises, the value of its property would be calculated and added separately.

You could add your salary – the earnings you, as an owner, take out of the business – to the profit figure, as this is something the new owner would inherit.

Factors such as competition, number of years established, growth rate, unexploited opportunities and so on will push your valuation towards the eight times multiple of profit.

If the business is a strategic acquisition then it might go beyond the eight times multiple of profit.

Valuing an owner-operated business – an example

Joe's Convenience Store

Established five years. Good trading location with car parking nearby. Nearest competitor is more than one mile away. It has accommodation above the shop, making it a desirable opportunity.

  • Annual Sales: $700k (has been consistently $700k for three years running)
  • Profit (including owner's salary): $100k
  • Freehold property value: $300k

Because of the common nature of the business – being a convenience store – the business will be valued at the lower end of the 3x8 multiple of profit. But because the convenience store is established for five years, has good trading history and has little nearby competition it would not be unreasonable to ask for a four times multiple of profit – so $400k. However, it would arguably be difficult to sell at a higher price.

Add to this the freehold value of the property of $300k.

It would therefore not be unreasonable to see a business like this valued at $700k

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