3 Things You Need to Evaluate a Business for Sale
There are tons of people out on social media giving business advice. Some of it is good advice, but most of it isn’t good. In this new series watch CapForge’s owner react to different advice videos. He’s an expert in all things business and has 20+ years of experience under his belt. Some of the things he reacts to might even surprise you!
CapForge Founder and Owner Matt Remuzzi reacts to business advice being shared on the internet. In this video, he reacts to this video that talks about the three things that help evaluate a business when you’re looking to buy one.
Video Transcript:
Business Advice Video:
What are the three things you need in order to value a small business? First profit and loss statement. How much money is coming in? How much money is going out? Two is tax returns. You wanna match up what the owner says they make aka their P&L with what they pay the tax man. Cause guess what they’re probably not overpaying the IRS. Third understanding of the market. What do these things trade at? Small businesses typically trade at anywhere from 2 to let’s say 6 x profits. So if your small business has 100k in profits you should be buying it for 200 to 600k.
Matt’s Review:
Well, the devil is definitely in the details. So I would say she’s right as far as you wanna have P&L, but also financials and balance sheet. Disregarding the balance sheet could be a big mistake in valuing a business. Yes, you wanna have tax returns but also understand that while most people don’t overpay their taxes, some people do. Cause their CPAs don’t know what they’re doing. Or didn’t take advantage of all the deductions they could have gotten. But also There’s always a difference between how tax returns are calculated and how financials are done. you need to understand that difference and make sure the difference that you might be seeing between those two things is real and accurate, not artificial. And 3, I would say, yes, you wanna understand the market. In general, you wanna understand the growth opportunities in the business you’re buying and the risks. But two to 6X is a big stretch for small businesses depending on what you consider small businesses. But if your business makes $100,000, there’s no way you should be paying 600,000 for it. Two to three X is really the most for businesses that size. And even up to a million or a million and a half of profit is only gonna
be worth three to 4X. 6X is a big stretch for the size business that she’s referencing in her example. 6X is a business that makes $3 million a year net profit. And really when you get to that size it’s not net profit it’s EBITDA. And when you’re in a smaller business it’s net profit plus add-backs, which are the personal expenses that the business owner runs to the business to reduce net profit to reduce taxes. I understand it’s a short video and she’s just doing the high-level facts but don’t take that and try to run with it on your own. There’s a lot more going on. If you wanna check out our due diligence video, where I cover what we cover in doing due diligence for exactly these kinds of things. Valuing businesses, selling businesses, buying businesses. There is a lot more to it. so check that out if you’re interested.
