Valuation of a Small Business

[KennyBanya]

Hi,

Does anyone have any good resources for attempting to determine a fair purchase price for a small business?

I am looking at it from a buyer's perspective if that matters. Hopefully there is a website or book you can recommend to put a value on a business.

Peace,

KennyBanya

[elus2]

valuation by damodaran

[Colt McCoy]

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valuation by damodaran

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That site is the most awesome thing on the web.

[stu_ungar]

Basicly you take the cash flows that are going to come in from the business and divide them by the rate you would recieve on your money from a similar investment of equal risk and minus the expected growth. I know i put this in the stock question but it realy applies here.

If you expect to bring in 10K from a restraunt, you expect it to grow 4% per year and a equaly risky investment would give you 10% return on your money you would do this

10,000/.10-.04=$166,000 value of the restraunt

If you dont expect it to grow leave the growth out
10,000/.10=$100,000 value of the restraunt

That is the best way

[woodguy]

Standard valuation in my industry is:
net assets + (forcastable yearly profits on current business)(5) = cost

edit: added yearly

This is private retail/wholesale building materials business, and there are not a lot of buyers for these types of businesses, requires a lot of local knowledge which really limits the # and type of buyer

5 was bolded since this is a common benchmark but more and less does get paid.

Regards,
Woodguy

[stu_ungar]

That is a quick and crude way of valuating a business, the forumla I put up is the single most powerful and important forumla in the history of finance. It works for valuating anything you do with your money.

[Colt McCoy]

[ QUOTE ]
That is a quick and crude way of valuating a business, the forumla I put up is the single most powerful and important forumla in the history of finance. It works for valuating anything you do with your money assuming you know what your growth rate will be into perpetuity and you can accurately define and measure "risk".

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Agree that dcf is always better than the back of the envelope methods people use, but it's not as simple to use as you imply.