Most times, an entrepreneur does not consider the amount of capital invested/required for some types of businesses that will reduce value of the business when it comes time to sell. This includes large amounts of capital for equipment, inventory and/or leasehold improvements that are needed to operate the business.
The main basis for establishing the value of the business is the total cost of acquisition, including inventory and assets, divided by the asking price. This calculation equals what is called a multiple of earnings. The multiple of earnings is a hard range based on what other similar types of businesses have sold for in the same owner-benefit range. The calculation is blind to the inventory amount or amount invested into assets, including lease-hold improvements.
What this means to the seller is that the multiple of earnings is locked in, so the amount of money the seller will walk away with will be less — sometimes a lot less — than a business with little or no inventory or other assets by comparison. As much as the seller protests about this not being fair, it is the reality; it is what it is. I see this often, and there is nothing that can be done about it if the inventory or assets are needed to operate the business. Be aware of this in your planning. As a seller or a buyer, if you would like a confidential conversation about how to prepare, please contact me on my cell, 954-579-4687, or by e-mail at bobd@dolansales.com. My LinkedIn profile is at http://www.linkedin.com/in/dolansales.
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