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Certain situations require a formal business appraisal including the larger merger-acquisition transactions, SBA loan applications, management performance tracking, estate planning, divorce — or the most dreaded of all — IRS issues. After all, a professional, fully documented appraisal certainly takes the guesswork out of the situation.
There are two methods of quickly approximating value: What are discretionary earnings? Almost all privately held businesses will appraise for somewhere between one to five times discretionary earnings. Exactly where in this range that a specific business falls depends on the type of business.
A retail gift shop is worth about 2. Home health care is 2 to 4 times; dry cleaners are 2. Where within these ranges by category a particular business falls depends on many factors considered by valuation experts.
As other examples, auto service shops will be valued at 25 to 30 percent of annual gross revenue and, astoundingly, profitable radio stations will be valued at anywhere from 1.
None of these appraisal guidelines include the value of any real estate or inventory on hand. And inventory, at cost, should also be added to obtain the total estimated value of the business.
However, you as the owner, seller or buyer of the business are the final arbiter of what the business is worth to you. Remember, these guidelines are only averages.
Interestingly, there is little geographic deviation in the value of businesses. A gift shop in Alabama with similar financial performance is worth about the same as one in California.
Here are additional articles that might be of interest: In our practice, we also provide nationwide consulting services to individuals who are considering buying or selling a privately held business. William Bruce is a business broker, an Accredited Business Intermediary and a business appraiser.
He currently serves as president of the American Business Brokers Association. His practice includes consultations nationally on matters involving business valuations and transfers. He may be reached at or by email at Will WilliamBruce.
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