Shahriar Chowdhury ⋅ Gaithersburg, MD U.S. Army, Captain ⋅ 4 years served

Business valuation is a combination of art and science. Most M&A firms use Discounted Cash flow method of valuing a business.

Jennifer Polhemus ⋅ Santa Monica, CA Precision Research (self-employed) ⋅ 25 years experience

I like John Green's advice -- try to do more than buy yourself a job.

What about the candidate business has value? How certain is the growth potential? What proportion of its total revenue comes from its 5 or 10 best customers?

If the profits are $45K before the owner is paid anything, then think of the owner's paycheck as $45K (less 15%+ for both sides of Social Security, plus other fringes).

And, yes, use Excel over some canned "business val" software.

John Green ⋅ Cary, NC Information Technology ⋅ 40 years experience

Public companies get 22 times annual earnings on the stock market. Buying a private business typically would involve some multiple of annual earnings.

So for example if a business has consistent annual revenues over the last seven years of 1 million per year, the owner could ask for several million as an asking price.

You do not want to buy a full time job. If you can only expect to earn 100k or 200k per year net revenue, buying that business is not worth your time.

Make sure you have an attorney represent you to protect your interest : non-compete, non-disclose, etc. The last thing you want is to buy the business then all the customers follow the original owner.

Don't buy a business you have no experience in. If you are buying a pizza place, work in a similar place for a year. Then buy the pizza business.

David Akre ⋅ New York, NY A NYSE listed financial company ⋅ 25 years experience

Depends on the type of business based. For example a financial services company will have fairly standard industry rules about valuation based on multiple of earnings, plus any current equity. However a food service business will go at a multiple of revenue as there typically isn't very good accounting involved.
One good way is to look on line at prices for that type of business for sale and see if you can find a consistent pattern, or ask a business broker for some advice.
Don't over think it. Usually people in that line of business will have very simple rules of thumb. Just figure out that out.
Best of luck.

William Ryan ⋅ New York, NY Circulation ⋅ 27 years experience

Most business we bought we used excel with all the data the company could provide and as much public data we could find( census, trade orgs, public companies 10K and annual reports)