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How much is a business worth?

Your question:

Is there a ‘rule of thumb’ number to use when someone is buying a business? I’ve heard of % revenue, is there a standard amount or other indicator of a fair price? I am looking at the purchase of a ‘pub/eatery’ that has gross revenue of $830,000, gross income of $440,000 and a sales price of $500,000 with no real estate.

Linda says:

As to business valuations for sale, there are general rules by type of business, but no overall rule that I am aware of that fits every type of business.

I recommend you find a person who assists with business sales in your geographic market and introduce yourself to them. Have lunch and get to know them. This could be a good business referral contact for both of you and you’d have someone active in the field to bounce questions off of when something comes up.

Another choice: search the internet for information. I found this link: Valuation Multiples which is interesting. I cannot vouch for them at all, but it gives you an idea of the variation among industires and if you think you’ll have enough use for it, gives you a report you can purchase that covers many industries.

Another interesting link: Novars Group gives a primer on business valuation and some possible formulas.

And then you always have the ultimate test… the amount a willing buyer and a willing seller, neither under compulsion to buy or sell and both knowledgeable about the business and area, agree on. So if you think the buyer is knowledgeable and has been successful in this type of business before, that is a good sign that the price is right.

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.