Gonna Sell - More Questions

Tom: Yes and no. If I were advising the buyer, I would consider some of these things but only in how it would allow the buyer to earn more money. However, I would not give credit to the seller for the purpose of calculating the price. My position generally would be: if you tell IRS that it is an expense, then I believe it is an expense. Most people in anticipation of selling their business would reduce these types of expenditures to their bare necessity for a period of about three years prior to the sale.

This is similar, although not the same thing, as the seller saying, This is, of course, is what I report to the government. My real earnings are $$$$$. I don t believe that either and my experience is folks who do end up getting cheated.

Tom: The $500,000 business studied by Asset Business Appriasal of San Diego were businesses selling for $500,000 not having sales of $500,000. In your example, assuming earnings was the same as cash flow, the $1.0 million sales business earning $200,000 would sell for about $500,000.

They studied businesses selling for less than $500,000, so the study can not give an answer to your $1.5 million sales company earning $300,000 (which theoretically would sell for $700,000 if the multiple holds). However, in my experience, the multiple (2.5) in the multiple method usually deals more with the industry, etc., than the specific earnings level (genetic research and internet-type companies bring a higher price/earnings multiple than a printing company). In short, I don t think the multiple would vary that much for our types of businesses based on earnings level.

Tom: Reality is reality. Potential is potential. There is no balance. A buyer buys reality, period. If you want to sell me potential, I would ask, How come you haven t done it if it s so easy? If you really want to sell your business, clean it up and run it crisply for three years. Turn potential into reality and then sell the reality. Potential only sells to a guillible buyer.