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
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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
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Reyes like over 50 TV I hope I've helped
you and I hope you have a great day
everybody