What Are the Rules of Thumb for Business Valuation?

What are the convenient rules of thumb for business valuation?  Small and medium-size business valuation issues can be confusing.  But there are rules of thumb for business valuation that can get you in the ballpark.

Rules of thumb for business valuation

What are the rules of thumb for small business valuation?

Certain situations require a formal, written, fully documented business valuation.  However, what we’re talking about here is not a formal appraisal but rather using widely accepted rules of thumb for estimating business value.

All of the guidelines we’ll quote are based on the opinions of industry experts and averages derived from hundreds of completed transactions reported to national databases.

The Two Methods

Two commonly used rules of thumb for quickly approximating the value of a business are: (1) applying a multiple to the discretionary earnings of the business and (2) applying a percentage to the annual gross revenue of the business.

The most accurate of the two guidelines seeks to approximate the value of a business by applying a multiple to the company’s discretionary earnings.  What are discretionary earnings?  Discretionary earnings are NOT the profit or loss that you show Uncle Sam on your tax return.  To put it delicately, almost all business owners run some expenses through the business that are — a’hem — not absolutely necessary to the operation of the business.

What Are Discretionary Earnings?

Discretionary earnings are the total cash that the business generates in a year that is available to the owner after deductions for only the necessary operating expenses.  Another way to define discretionary earnings is that it is the “total owner’s benefit” derived from owning the business, regardless of how the owner takes the money out of the business.  Here’s an article explaining the subject in more detail.

The Multiple of Discretionary Earnings Method

Almost all privately held businesses will appraise for somewhere between one to six times discretionary earnings.  Exactly where in this range a specific business falls depends on the type of business.

From the database of completed transactions, we know that an air-conditioning/heating contractor, for example, is valued at approximately 2 to 3.5 times discretionary earnings.  A retail gift shop is worth about 2.5 to 3.5 times discretionary earnings.  Home health care is 2 to 4 times; dry cleaners are 2.5 to 3.5.  Wholesale distributors, in general, are valued at between 2.75 to 3.75 times discretionary earnings.  Where within these ranges by category a particular business falls depends on many factors considered by valuation experts.

The Percentage of Revenue Method

A less accurate rule of thumb method of estimating the value of a business is to apply a percentage to the company’s annual gross revenue.  For example, a full-service restaurant will be worth about 30 to 40 percent of annual gross revenue if — big “if” — it’s earning the average bottom line profit for its peer group.

As other examples, auto service shops will be valued at 30 to 40 percent of annual gross revenue, long-haul trucking companies at approximately 40 percent, and dry cleaners at 60 to 70 percent.

But again, remember that these values derived by using a percentage of annual revenue must be supported by bottom-line  earnings.

These Items Should be Added to the Guideline Results

None of these appraisal guidelines include the value of any real estate or inventory on hand.  If the business owns real estate, the value of the realty should be added to the guideline result.  And inventory, at cost, should also be added to obtain the total estimated value of the business.

In Summary

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.  And the guidelines certainly don’t take into account any special considerations or any future plans that an owner might have for the business.  What a particular business might be worth to you may be more or less than it’s worth to the next person who looks at it.

One final observation:  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.

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Here are additional articles that might be of interest: Small Business Valuation Multiples Explained, How to Analyze a Business You’re Considering Buying, How to Write an Offer to Buy a Business, and How to Handle the Due Diligence Investigation When Buying a Business.

If you have questions about business valuation, please contact me at (251) 990-5934 or Will@WilliamBruce.org.  In addition to estimates of value using rule-of-thumb guidelines, we also produce written, fully documented business appraisals for banks, business buyers and sellers, minority / majority partners and others using at least two methodologies to come to a conclusion of market value for any particular business.

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William Bruce is an Accredited Business Intermediary (ABI) and a Senior Valuation Analyst (SVA) assisting buyers and sellers of privately held businesses in the transfer of ownership.  He currently serves as president of the American Business Brokers Association.  His practice includes consulting services nationally on issues of business valuation and transfer.  He may be reached at (251) 990-5934 or by email at Will@WilliamBruce.org. 


(C) Copyright William Bruce.  All rights reserved.

About William Bruce

President, American Business Brokers Association / Business Broker and Accredited Business Intermediary assisting business buyers and sellers with the transfer of ownership since 1986 / Author: How to Buy a Business.
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209 Responses to What Are the Rules of Thumb for Business Valuation?

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  2. Bob Veris says:

    Hey Will,

    You’re a rare find! I concur with your astute commentary. As a former Business Broker (who preferred to be called an Intermediary Consultant–since we worked both sides of the transaction, but never concurrently), I totally respect YOU but still don’t have a warm and fuzzy feeling about the low-end brokerage industry in general.

    My biggest issue was that “they” were always more interested in “getting listings” and not representing clients. Back in the day, we actually refused more “listing” than we took–simply because without full disclosure before-the-fact, there was nothing to talk about.

    We knew what we needed and if a prospective client couldn’t/wouldn’t comply, it made no sense to get involved. The notable exception was the owner who had established an asking price. We challenged him to demonstrate that his business had such worth. (In 20+ years, only one rose to our criteria–by producing a formal, third-party valuation.)

    For my money, any deal that did not have such a “tool” at hand, before attempting to go to the street, was a waste of time–surely precluding our involvement. In other words, every client that we represented (not “listed”) had to have (our firm mandate) a valuation–period. This when we started to charge a retainer–yes, even on the low-end. $5,000 was magic (put-up or shut-up) number for deals under $1 million, and $10-15,000 on larger transactions.

    Okay, you guessed it: huge-resistance initially…but logic prevailed…or we said goodbye. Granted, the main st (low-end) was not used to wall st tactics, but we knew our worth measured by our percentage of success. We didn’t work for common commissions … ours were success fees, and very well earned at that! Sorry, enough reminiscing…

    Good luck, my friend, stay well, and keep on helping “clients” on the low-end, and they should be constantly reminding every time they call upon you: “in the real world, you always deserve what you pay for” (or didn’t!).

    Best regards,

    • Thanks, Bob, for your kind comments. I appreciate your perspective. What are you doing now after your intermediary days?

    • Melissa says:

      Very interesting article, thank you. What would be the percentage of revenue or the multiplier of SDE for an oilfield services company?

      • Melissa, I couldn’t find a rule of thumb using a percentage of revenue. But one resource gives 2.5 to 4 times discretionary earnings. The oil and gas service industry is a broad cross-section of industry segments and varies widely in size and type. Value parameters will vary accordingly relative to individual market segments. Hope this helps a bit. ~William

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  4. Engagement Rings says:

    Very interesting topic , thanks for putting up.

  5. Paul Heinze says:

    4 14 11

    Greetings Bill:
    Nicely presented article!
    You’ve hit it squarely as to a value overview.
    I’ve been an Advisor, Business Broker and Appraiser for more than thirty years.
    It’s refreshing to see competence and experience presented so well.
    Thank you!

  6. Paul, thanks so much for your kind words. Where are you located?

  7. Terrific post. It’s a real, real shame more entrepreneurs don’t understand this.

    An interesting note for entrepreneurs: all of the methods discussed above involve multiplying your earnings by some other number(s). Zero times any other number is zero. Therefore, if you have no earnings, your business’s value is zero (plus any valuable assets you may hold, like real estate).

    Good ideas, sweat and tears, ambition and potential are literally worthless from a financial perspective. I’ll say it again: if your revenue is ZERO, your firm value is ZERO. If you’re going to appear intelligent in conversation with investors, you MUST understand how firm value is really created.

  8. Pingback: What is Business Goodwill? | William Bruce on Business: A Discussion

  9. Steve says:

    What is the multiplier for gross revenue on an automotive shop?

  10. Steve, thanks for dropping by the blog. Auto repair shops are valued at 35% to 45% of annual revenue plus inventory at cost. Or another more accurate guidleine is 1 to 2.5 times discretionary earnings (adjusted cash flow) plus inventory for businesses with discretionary earning below $100K, and 3 times discretionary earnings for businesses over $100K in earnings.

    Hope this helps. Let me know if you need assistance in valuing a business.

    Best wishes,


    • james says:

      Hello, William.

      Thanks for a well written article.

      How is the equipment and furnishing owned (lifts, machinery, shelving, etc.) by an auto shop factored into its value? Would equipment/furniture value be in addition to inventory and percentage of annual revenue? Or, is equipment/furniture value part of the 35% to 45% of annual revenue equation?



      • James, the furniture, fixtures and equipment is included in the multiple / percentage valuation formula. Inventory, at cost, is added as is real estate if it’s going to be part of the transaction. Hope this helps.

  11. redheadmama says:

    How about an online business? I have an opportunity to buy an online pet retail business that is basically a one-person operation. Average profits for the last five years are 300k, with expenses of 50k. Assets estimated under 10k. It’s such a simple set-up that I’m having trouble finding a good reliable valuation for it, and I’m not sure what to offer her.

  12. The rule-of-thumb valuation range for e-commerce sites is 2.5 to 4 times seller’s discretionary earnings (cash flow). Where in this range a particular business falls depends on the market trends, the particular company’s trends (growing or declining) and the willingness of the seller to finance a portion of the investment, among other factors.

  13. jimhankmom12 says:

    Is there a tried and true formula for determining discretionary earnings?

    She wants to owner finance.

  14. Discretionary earnings, also know as owner’s cash flow is computed as follows:

    To the profit or loss shown on the business tax return, add
    1. Owner’s W-2 salary (if any)
    2. Any non-cash deductions (eg: depreciation, amortization)
    3. Any owner’s perks listed in expenses that are not necessary operating expenses of the business (eg: vacations charged to the business, cars, etc.)
    4. Any one time repair or other expense that will not likely recur
    5. Any interest expense

    The result is discretionary earnings. The definition of discretionary earnings is that amount of cash left over after only the necessary operating expenses of the business have been paid that is available for (1) owner’s remuneration, (2) return on investment and (3) debt service, if any.

    Hope this helps.


  15. Steve says:


    Could you tell me what the multiplier for cash flow is for a mail, pack and shipping franchise? What about a percentage of gross sales also.


  16. Steve, the guidelines for a pack and ship store are:

    (1) 40 to 45 percent of annual sales
    (2) 2 to 3 times discretioanry earnings (cash flow)

    Both of these guidelines include inventory. The multiple of discretionary earnings guideline carries more weight than the percentage of annual sales guideline.

    Best wishes,

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  18. William Kline, CFA says:


    Thanks for sharing. Isn’t it appropriate to note that the add-backs you mention (real estate value + inventory) are only added back if they don’t contribute the cash flows from continuing operations? You should only add inventory if it is excess inventory. After all, inventory is part of working capital, which is a component of free cash flow that you use to estimate value. Likewise, if real estate is part of the production capacity of an organization, its value contributes to cash flow generation. It’s a nuance that a lot of clients miss.



    • Bill:

      Thanks for visiting and commenting.

      We use the “Business Reference Guide” published yearly by Business Brokerage Press. The Guide is generally regarded as the most authoritative reference source for pricing guidelines for small to medium size privately held businesses. The Guide covers hundreds of business categories, literally from ice cream stands to manufacturing plants.

      The rule-of-thumb guidelines contained therein do not include inventory or real estate, unless specifically mentioned. The pricing guidelines are derived from closed transactions and industry experts.

      Inventory fluctuates greatly in some types of businesses (particualarly seasonally in some situations) so we can obtain a more accurate appraisal with a guideline exclusive of inventory, and then add the inventory value at the end. And to automatically include a real estate value in a guideline would distort the value of those businesses in leased locations. It is just more accurate to account for these two values separately.

      • William Kline, CFA says:

        Thanks Will. So all the transactions you’re using as a starting point omit those values. Makes sense for a quick and dirty value.


      • Avinash says:

        A business with real estate should be valued as if the property is leased on market terms so that earnings are normalized. I believe it is only then can adding back the value of real estate would make sense to be comparable with other businesses which do not own real estate by pay for lease rent.

      • Avinash, thanks for dropping in. You are absolutely correct and this is a good point. I recently handled the sale of a manufacturing plant in which the business owner also owned the real estate, but wasn’t paying himself any rent. We imputed a market rent expense, and in recasting the profit and loss statement, this imputed rent expense became a deduction from cash flow.

  19. John Haynes says:

    Thanks dear old friend. I have planned to sell or close my busines when I turn 70. Two years hence. Your article has given me food for thought. Because Christian bookstores are trying to adapt to a new and only partially understood paradigm, I may just try to get someone to “rent to own” the store. What do you think?

  20. John, it is GREAT to hear from you after all these years. Hope all is well.

    Even within a business niche area that is changing significantly, an ongoing business has value over and above its liquidation value, so I would advise trying to sell the business rather than closing.

    A rent to own sale, in my experience, is pretty risky. I think a better solution might be a sale in which you take a negotiated down payment, and finance the balance. You take a note payable from the buyer and retain a chattel mortgage on the furniture, fixtures, equipment, inventory and trade name of the business. A popular form of seller financing is a balloon note in which the payments are calculated on a 10 to 12 year amortization schedule, but a balloon payment of the entire balance is due in 3 to 5 years. This is explained in a 40-page booklet I’ve written on how to sell a business. I’m emailing you a copy of it.

    I would love to see you. Let’s get together and reminisce about the Auburn years. Let me know if you ever get down to the beach area here, and I’ll call the next time I’m in Atlanta.

    Best wishes,

  21. Pingback: Are You Thinking of Selling Your Business in 2012? | William Bruce on Business: A Discussion

  22. David says:


    Very interesting site, thank you very much for the useful information. I have been trying to do a little research on how software companies would be valued. In 2007 my company was valued at 5.9M by an accounting firm, and has tripled its sales and customer base since. My issues with determining even a rough estimate are:
    1) How does consistent annual growth factor into the valuation?
    2) My largest expense is salaries, of which I could cut 15% without affecting productivity.
    3) I know we are on pace for a record year, and are introducing new revenue streams which will cause a larger increase.

    Am I struggling because it is just the wrong time to consider selling?
    Would we be 2.5 to 4 times seller’s discretionary earnings?

    Thanks very much,


    • Dave, thanks for dropping in. The latest guideline for software companies is “2 to 3 times revenue (trailing 12 months) plus inventory.” That’s about as strong as I’ve seen.

      Other comments in my reference sources are:

      “There is not ‘typical’ rule of thumb because individual software companies can have widely different cycles and growth phases. Classic measures focus on revenue amounts, consistency and growth, although revenue recognition policies vary and market conditions can change quickly.”

      “Usually no bank financing involved. Average deal is 50% liquid, 2 year employment agreement, 3 to 4 year non-compete. Most buyers are public and hi tech in order to leverage the purchase. 35% are international buyers.”

      Hope this helps. Call me at 251-626-4949 if you would like to discuss further.

  23. Brian says:

    Thank you for posting your article. I found it very helpful. Are there any multiplier guidelines for a manufacturer’s sales representative business in the heating and ventilation industry? The company is an independent sales office for the manufacturer. The cash flow appears to be steady each year but there are risks due to the contract with the manufacturer. There is a 30 day cancellation policy if the manufacturer decides to cancel the contract which is a major concern but this company has been a representative for over 30 years. The customer base has been built up over a long period of time in the heating and ventilation industry. It is only a 3 person office (2 sales people and 1 office manager) and it does require the business owner to have knowledge of the products along with doing majority of the sales. There are very few assets to the business. Would the owners typical sales salary be part of the actual expenses or would the salary of the owner always be included in the discretionary income? Please let me know your thoughts.
    Thank you for your time,

    • Brian, thanks for your comments. I could not find in my various reference sources an appraisal guideline for a manufacturer’s rep. To answer the easy question first, one owner’s salary is included in the discretionary cash flow of the business. An appraiser would most likely take into account the one supplier / cancel clause issue and discount the value somewhat for this factor. I would think that somewhere around 2 times discretionary cash flow would be approximately the value of the company. In a situation like this, an “earn out” for most of the purchase price based on sales would be advised. That way, some of the risk of cancelation of the contract rightly remains with the sellers.

  24. Mark says:

    Hi Will,

    I am looking at a Play it Again Sports franchise for sale. It has been in business for 21 years. Owner is asking $700,000 plus another 130k in inventory. With some additional franchise requirements, the total investment is around $930,000. Owner claims $200,000 in “Cash Flow.”

    Is there a muliplier for sporting goods (50 percent resale and 50 percent new in this case)?

    Does his asking price sound reasonable or overvalued?

    Thx for your professionalism in this article!


  25. Mark, we’re in luck. I found a specific valuation guideline for Play It Again Sports in our most authoritative resource, the Business Reference Guide by Business Brokerage Press. It is “40 to 45 percent of annual sales plus paid-for inventory.” I would add as a reality check that the resulting valuation using the above formula should be somewhere around 2.5 to 4 times discretionary cash flow. Just make sure the cash flow number is calculated correctly with the adjustments fully documented.

    • Mark Phillips says:


      Thanks so much for your reply! I can’t thank you enough for finding the specific formula for the exact business I’m looking at purchasing!

      You have been so very helpful you have no idea!


  26. John McKay says:

    Thank you for an informative article. Would you have any idea about a factor to use in evaluating a sole proprietorship farm equipment (grain drying) installation business? Thank you again! John McKay

    • John, I couldn’t find any valuation guideline for this business. I would think about 2.5 to 3.0 times discretionary cash flow would be appropriate. Just make sure the cash flow is computed correctly.

  27. What is the multiplier for owner’s discretionary cash flow for a commercial laundry (not laundramat)?

  28. I couldn’t find a guideline for commercial laundries. For dry cleaners, the rule-of-thumb is 70% of annual revenue, or more accurately 2.5 to 3 times discretionary cash flow.

  29. Dave Hemmingsen says:

    William. Great article. I have started and sold a few businesses over my lifetime but never had this type of information at my fingertips. We own 75% of two successful pawn shops / gun stores and two Express Tax Service businesses that my son, 25% owner, would like to purchase from us. They have lots of cash flow and lots of inventory and are growing steady in this horrible economy. How do they value up?

    • Dave, the guidelines for pawn shops are (1) 40 to 70% of annual sales plus inventory, or (2) 2 to 5 times descretionary earnings including inventory. That’s an unusually wide range with quality of inventory, location, growing or declining revenue, and amount of “money on the street” being factors influencing where within this range a specific business falls.

      I couldn’t find a specific guideline for Express Tax Service, but I did find one for Liberty Tax Service, which I think would be comparable. It is 45 to 50% of annual revenue.

      If you need a written appraisal, let me know.

  30. Farid Rajkotwala says:

    Thanks in advance for the very insightful article and any response you are able to provide!

    What kind of multiplier would you say there is for an apparel / novelties screen-printer? Would it be considered a light manufacturing plant (3x)? One I’m looking at has a multi-platform automatic machine and manual machines as well as some embroidery so it is a mid-large size custom-apparel printer (also do other clothing, hats, novelties, etc) that involve the same technology.

    Having a real difficult time coming up with a true value for this and breaking out discretionary earnings entirely based on their Income Statements and claim to put money in many places which I do not know how to verify for accuracy.

    It seems their growth has been very minimal the past few years based on the Income Statements, but they spend next to nothing on advertising and claim they have been happy with what the business turns out at the moment… Have been in business 15 years with customer growth early on, and now stable/consistent customer base…. and they are looking to get out to go into retirement in Central America.

    • Farid, the valuation guidelines for silk screen printing are (1) 40 to 45% of annual sales plus inventory or (2) 2.5 to 3 times descretionary earnings including inventory, with the multiple of descretionary earnings carrying more weight. Any add-backs used to compute descretionary earnings need to be documented by cancelled check or other reasonable documentation.

  31. Steve says:

    Great article, it has been very informative. I’m thinking about buying a local taxi company that has been in business for years. What formula would you recommend for a taxi business? Also what % of gross sales on average would you expect to see as net income?

    Thank you in advance!

  32. Steve, thanks for dropping in. The latest I can find on valuing taxi companies is 4 time EBITDA plus the value of the vehicles. EBITDA is earnings before interest, taxes, depreciation and amortization. I couldn’t find anything on percentage profit on gross. Hope this helps.

    • Mark Phillips says:

      Hi William, I am looking at a business for sale. It is a box and packaging business. He is asking 400k. Annual Gross income is $320k. Cash flow is reported to be roughly 115k per year. He is throwing in 2 delivery vehicles. However, he is a sole prop. and has no one else assisting him in the business. He’s a one man band. His vacations are relegated to 3 day weekends. He takes zero time off. Do I have a case that his business is over valued due to the business solely resting on his shoulders and if something were to happen to him (or me), the business essentially goes under, not to mention not having the ability to take any time off?

      My thinking is I have to figure the costs of hiring someone else to run this business on my behalf if I want to take time off or if something were to happen to me. Am I correct or off base?

      Thank you in advance sir.


    • Johnny says:

      Can you please tell me the resource for this taxi cab valuation.

  33. Mark, I have several thoughts. First, it would be rare for a business to sell for more than its gross annual revenue. Second, the cash flow sounds high at 36% of gross annual revenue. This is not impossible for it to be this high, but you need a detailed and documented cash flow worksheet to make sure it has been computed correctly. And yes, you are right that you would need to take an employee’s salary out of the cash flow when you are projecting how you would run the business.

  34. Edward Brown says:

    The article has been very helpful along with all the blogs, especially your answer ‘s to them.
    I was wondering about the amount if you have a formula for valuing a DME (durable medical equipment) company on both multipliers (DCF) and gross income %.

    Thank you for your help,

  35. Edward, thanks for visiting. For DMEs, we use 85% of annual sales plus inventory, or more accurately, 4 times DCF plus inventory. Hope this helps. ~Will

  36. Hey very interesting blog!

  37. Ben says:

    I like it when folks get together and share ideas. Great site, continue the
    good work!

  38. Nate Deskins says:


    What a fantastic article. Thanks for taking the time to write it! Would you have a formula you would recommend for finding the value of my IT company?

    Thanks so much for the help!


    • Nate, I would need to know a little more about the company. Let me know what type IT company it is and I’ll see what I can find.

      • Nate Deskins says:

        Thanks for such a quick reply! We offer computer and network support for companies that don’t have a full time IT staff. We are not web designers, software developers, or strictly consultants.

        Thanks again

      • I understand. Let me get to the office in the morning and see what I can find by way of valuation formulas.

      • Nate, the Business Reference Guide, our most authoritative reference, gives a valuation formula for “Computer Services” as “55 percent of annual sales, plus fixtures, equipment and inventory.” Under a second category labeled “”Computer Consulting” the guideline is “50 to 65 percent of annual sales plus inventory.” Hope this helps.

  39. Nate Deskins says:

    That’s incredibly helpful, thanks so much! Is there a DCF multiplier available?

    Thanks again for all the help

  40. Jim Scarlett says:


    I have been reading through your various comments on valuations and find them very helpful. I am approaching retirement and would like to sell my business to my son and his colleague. Our business would best be described as combination mfg rep/wholesale distribution. We sell machine tools on a commission basis plus have profit centers in used machinery, technical service and commodity supply items. The company is 45 years old and 40 of those were serving the housing related trades with our machine tools. With the nasty recession just now ending, how can I best determine a earnings period which best represents the earning potential and what should the multiple be? Thanks.

    • Jim, the Business Reference Guide gives the folloiwng valuation guidelines for “Wholesale Distribution in General” = 65% of annual sales plus inventory or 2.75 times SDE. It’s a tough call on a business like yours that has taken a hit during the recession. In a distress sale, an arm’s lenght buyer would base the value on the last three years, and the seller would most likely take it. However, in your case and with your history, I would average the results of 2004, 2005 and 2006 with the last three years in an attempt to hit an acceptable value.

  41. Fernando says:

    Thanks for your article! How much do you think could be the multiplier for a residential Real Estate office with 10 agents representing buyers, sellers, tenants and landlords.
    Thanks for your time.
    Best Regards

    • Fernando: the Business Reference Guide gives the following for a real estate office:
      1. 2 times SDE; may require earnout
      2. 33% of annual sales.

      Hope this helps.

    • Mark Phillips says:

      William, I too sincerely appreciate all of the information you have provided! Your blog is outstanding! I am in light discussions with a seller of an internet based sports business. He has a website that sells flag football plays to coaches, as well as some flag football related products such as cones, flags, wristbands (cutters) with the plays, etc. His listing says he grosses 120k and nets 60k, although the financial statement shows more of a 105k gross and a 48k net. He is including 4k in assets. He is currently asking 150k for this business, which takes him 1.5 hours a day to successfully operate (4 years old). His website is very professional and I don’t think he is a bad guy.

      Any idea what this business is really worth? Is there extra value in this business due to the very brief amount of time it takes him to operate? It seems too high to me, but maybe I am wrong?

      Thank you William,


  42. The latest valuation information on E-Commerce websites states that they are worth approximately 30% of annual sales (from tax returns!) including inventory at cost, or 2.5 to 4 times seller’s discretionary earnings including inventory. The multiple of discretionary earnings is the more authoritative of the two formulas. The fact that little time is sometimes involved in management is one of the attractions of this type of business and is factored into the above formulas, which are averages of actual closed transactions.

  43. Wayne Cooke says:

    Hi Will,

    Interesting and informative, my question is; I have a carpet cleaning business I am considering selling, could you point me in the right direction, as I am at a loss to what I would list or sell it for, I don’t want to overprice but at the same time would like to be able to have a reason or formula to how I come up with a figure?

    Thanks for your info.


    • Wayne, the two valuation formulas for carpet cleaning are 50 to 55 percent of annual revenue or 1.8 times discretionary cash flow. The multiple of cash flow carries more weight than the percentage of revenue. Good luck with the sale.

  44. Caroline says:

    Hi William –
    I am interested in purchasing a luxury restroom company. The company currently does $1 million in revenue, with $200 to 250K profit. They have $600k in equipment and very few employees. Most of the equipment is paid off. Any idea what type of formula I would use in evaluating them?

    thank you

    • Caroline, I couldn’t find a specific guideline for this, so in this case, I think 2.5 to 3 times discretionary cash flow (correctly computed) would be in the ballpark. The formula would include the equipment which should be paid off by the seller at closing unless you agree to assume the remaining debt and deduct the assumed debt from the acquisition price. Hope this helps.

  45. John Cassidey says:

    Happy New Year William,
    What would DCF value be for a wholesale/retail liquor store in Ms.? Gross Sales $1.3K, gross profit 23%?

    • John, the most authoritative resource I have gives two guidelines for “Liquor/Package Stores.” The first is 40 to 45 percent of annual sales plus inventory. The second is 2.5 to 3 times sellers discretionary earnings plus inventory. Appraisers and business buyers will place more credence on the second guideline.

  46. Theodora C. says:

    Hello William,

    Your article has helped to shed some light on valuation for me, although I am still a bit up in the air. I am starting a lingerie line and I design them myself. I need to pitch investors to enable me raise capital for the factory work and marketing. I am in Nigeria. I would appreciate some more help, thank you!

    • Theodora, unfortunately this issue is out of my field of expertise. My experience is in valuing existing, on-going business entities. A start-up is a different animal. Good luck in your project. I hope to be reading about your success in the business press!

  47. Adam says:

    Hi William,

    Thank you for your thoughts on this topic. They are articulate and informative. What do you think of a mailing house with $2.5mill in revenue, $430 EBITDA asking $800K plus machinery (an additional $250K)?

    Kind regards,

  48. Adam, I couldn’t find a rule-of-thumb for valuing a mailing house / service, but I would think about 2 to 3 times EBITDA would be about right, including machinery.

  49. Kevin Cain says:

    Hi William. I have been in the health care business and understand valuations there but am considering a bar/restaurant situation and am wondering about valuations. What I have is fairly varied….of course the method depends on the type of business. e.g. 25%-50% avg gross sales; 1 to 5 times DCF; 3 times owner compensation; cap rates of 20% to 100%.
    What is your general rule of thumb?

    I am curious about your comment that it doesn’t differ by state. Is that really true? I’m looking at a place in Texas.
    Is the “Business Reference Guide” available to the general public? Would I be able to purchase that?
    Thanks for your thoughts.

  50. Bernadine says:

    Excellent, what a blog it is! This website provides useful information to us, keep it up.

  51. John says:

    Hi William, I own a youth sports summer camp business and hold events at colleges/universities across the U.S. each year. I also provide year round clinics and travel teams. My 2012 gross revenue was $720K and my EBITDA was $170K. I expect continued growth ($825 gross revenue and $200K EBITDA projected for 2013). Hoping to find a value for my business in order to sell all or part of it. Any help would be appreciated. Thanks! John

    • John, thanks for dropping in. I couldn’t find a published valuation rule of thumb for your type of business (as you might imagine!), so we have to fall back on judgement.

      I would think the value of your business would most likely fall in the range of 3 to 4 times a properly calculated EBITDA plus the value of any realty included in the sale. This is versus a most likely 2 to 3 times discretionary cash flow. Hope this helps.

  52. Alvin says:

    It’s hard to come by well-informed people on this topic, however, you seem like you know what you’re talking
    about! Thanks

  53. Jeff says:

    Thanks for sharing your insight. As you know often it is not what the owner wants, or what the buyer intends to spend, but what the bank will lend. Having a quick guide to evaluate a deal is valuable.

    • Jeff, thanks for visiting and for your comment. Your observation is “right on” as to the fact that financing many times determines the price of a business. Business sales in which seller financing is a component sell for 18% more, on average, than businesses without it.

  54. Adam_MB says:

    HI WIlliam

    Thanks for the helpful Blog. I’m looking to purchase a specialty outdoor sporting goods retailer (mountaineering, hiking, paddling, etc.). They have four locations, with gross sales around $1.8M, inventory around $500k. With this channel being in a general decline due to competition from Big Box and eCom, the owner doesn’t have many options for selling. Considering it’s a fixer upper, what kind of valuation should I expect?

    • Adam, thanks for dropping in. My reference sources give a valuation formula for Sporting Good Stores of 25% of annual sales plus inventory at cost.

      My reference also essentially restates what you have said: “Declining profitability due to ability of customers to comparison shop online.” The above valuation formula takes into account this negative aspect.

      You might also want to check the trade association at http://www.snga.org.

      Good luck with the purchase.

  55. Tom says:

    When coming up with a value of a company how do you address long term debt in the sales price?

    • Tom, the appraisal guidelines discussed here assume that all assets of the company will be delivered to the purchaser free and clear of any and all encumbrances. If the buyer assumes existing debt, that is considered as part of the purchase price. For example, lets say a business is changing hands for a total consideration of $500,000. If the buyer is assuming $100,000 of existing debt, then the seller would be due $400,000 at closing. The seller is still getting total consideration of $500,000 because he’s being relieved of the $100,000 existing obligation.

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  57. Curious One says:

    I am interested in your thoughts about the value of a fully operational, fully established, fully staffed, smoothly running Papa Murphy’s “take n’ bake” pizza franchise where the owner’s DCF (after all other expenses aka overhead/COGS/marketing/labor/fees/etc.) is ~ $160K per year. How would one value such an enterprise?

    • We’re in luck. I found a valuation formula specifically for Papa Murphy’s franchises. It’s 35 to 40 percent of annual sales plus inventory for resale at cost. Of course, this valuation has to be supported by the discretionary cash flow of the business.

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  60. Todd says:

    Excellent articles and resource. Will definitely recommend to others. What is the value for a home health business based upon annual gross revenue. Thanks.

    • Todd, thanks for visiting. For “Home Health Care – Care Giving” the guideline I’ve found is 50% of annual sales. But remember, this valuation must be supported by earnings.

      For “Home Health Care – Equipment and Supplies” the guideline is 85% of annual sales plus inventory.

      Hope this helps.

  61. Maria says:

    Can’t seem to find an answer to this problem. I have been working for a sole owner of a home based catering company, it has doubled business since I have been involved. We are looking to move and expand by starting a commercial kitchen. Full partnership with both of us coming in with $30,000.00 for start up. With me also buying in to established business. I would estimate the business grosses about 75-100,000 a year before any deductions. All equipment stove, refrigerator stays in her household. We would essentially be starting from scratch. But she has the client list and history. What would be a fair way to establish market value.

    • An on-going catering business is worth 35 to 40 percent of annual revenue, assuming discretionary cash flow will support this number. In a start-up, the business will be worth only the total of its tangible assets.

  62. Jacques says:

    Thanks so much.

  63. Derek says:

    Hi William,
    Thank you for this very informative blog.
    I am getting ready to purchase the dental laboratory that I have worked for over the last 12 years. Although this business has been in the black since day one I am having a hard time valuing it because of the unpredictable and uncontrollable profit margins (narrow customer base) and evolving industry. This business is dependent on the owner working it. I am thinking 1xDCF because of the small size and blue sky. Do you have any input on this? For simple math lets say total discretionary cash flow is 100k

    • Derek, my most authoritative resource guide for dental labs gives three rules of thumb:

      1. 45% of annual sales plus inventory
      2. 1 times SDE plus equipment and inventory
      3. 2 times SDE includes equipment and inventory.

      When the sales volume and SDE are variable, I average the last three years.

      Hope this helps. If you need representation, let me know. We frequently represent buyers in a transaction.

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  65. jt says:

    Great info and many thanks for your continued responses. I recently recieved an unsolicited offer for my business and was hoping for some valuation advice. I own a summer seasonal guided tour company and retail store. We have exclusive use permits, very little competition, and have been seeing 25% growth for the last 3 years. Based on existing demand, we just acquired two more use permits that will add 30 to 40% to our revenue, but haven’t had the time to show their potential cash flow. I was not considering selling the business for the next 5-10 years, so I haven’t been grooming the business for a sale … quite the opposite in fact. Any thoughts or valuation advice?

  66. Scott says:

    Hello William,
    The information you have provided is very helpful. Do you have any data on the valuation metrics for a company specializing in Wholesale & Retail, Turf & Irrigation Supplies for Golf Courses and Residential. Annual revenues north of $10 million.

    Thanks for your time.


    • Scott:

      “Wholesale/Distribution – In General” in the Business Reference Guide has three valuations guidelines: (1) 65 percent of annual sales plus inventory, (2) 2.75 times sellers discretionary earnings plus inventory and (3) 3 times EBITDA.

      “Retail Businesses – In General” from the same source is 30 to 35 percent of annual sales plus inventory or 1.5 to 2 times sellers discretionary earnings plus inventory.

      None of these guidelines include real estate, cash on hand or accounts receivable. You would need to appraise the two operations separately (retail vs. wholesale) and then add them together for a total valuation.

      Your total gross volume is of a size that would attract a lot of interest in today’s market.

      • Scott says:

        William-Do you have any input on valuation rule of thumb for Hotel Franchising Companies such as Intercontinental Hotel Group, Hilton etc. on to some of the smaller lesser known Hotel Franchising Companies? Thanks for any input you can provide.


      • Scott, unfortunately I couldn’t find any guidance on hotel franchisors. I did find three valuation guidelines for individual hotels / motels: (1) 250% of annual revenue, (2) 8 times discretionary earnings and (3) 8 to 10 times EBITDA.

      • Mark Phillips says:


        I own a security guard company. It’s a service based business with a pretty consistent recurring revenue model as most of my contracts are continuous with my clients. A few one off contracts such as an event or concert do occur but 99% of the revenue is ongoing.

        Can you advise the industry norm as to how a security guard company is valued?

        Thank you sir.


      • Mark, the valuation guidelines for “Guard Services” are 30% of annual sales or 3 times discretionary earnings. The additional comments in my reference source are that non-union companies are worth more and if guards are paid as 1099 contractors, the business is worth less. Hope this helps.

  67. B says:

    Lots of great information here. Thank you! Do you have any guidelines for a digital / social media marketing agency with revenue under $1m? Mostly recurring revenue from monthly retainers for on-going services, but no long-term contracts.

    • I couldn’t find anything specifically for digital or social media marketing agencies. As close as I could get was “Advertising Agencies” which are quoted at “50 percent of annual revenue (billings).” Hope this helps.

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  69. Scott A says:

    Hello William,

    As per B above – this thread is a goldmine!

    What would you suggest as a rule of thumb for a Stamp Dealership? That would be a company that publishes catalog of stamps and buys and sells stamps.


    • Scott:

      Thanks for your kind words.

      I couldn’t find anything in my reference sources on stamp dealerships or collectibles. The closest thing I could find were formulas for small specialty retail stores. Under this category there are two valuation formulas: 15 to 20% of annual sales plus inventory, or 1.8 to 2.2 times discretionary earnings plus inventory.

      Hope this helps.

  70. David Bindas says:

    Excellent blog with a ton of useful information here. What would be the value of a daycare center with SDE of about $140K and annual Sales of $550K?
    It comes with real-estate but the value is not disclosed. Can I check the property appraised value from the county’s property tax records to make an initial assesment of the valuation or should I get it appraised by a licensed appraiser?
    I calculated the valuation as (Real-estate value as per property records + 2*SDE + Vehicles&Furniture) but it’s much less than the asking price so I wonder if the property tax records is not a good place to check or the business is really over-priced.


    • David:

      Many businesses that are offered for sale are significantly overpriced. It is one of the most frequent problems that I encounter.

      My most authoritative reference source gives two valuation formulas for day care centers: (1) 45 to 55 percent of annual sales and (2) 2 to 3 times SDE. The real property value should be added to both of these guidelines for a total value. Don’t add any value for furniture, fixtures or equipment as their value is accounted for within the valuation formulas.

      The local county’s records would be a good place to start for real estate value. I wouldn’t pay for a real estate appraisal unless you need it later after you determine that the seller is going to be ball park reasonable about a market based price for the business and property.

      Good luck on the project.


  71. gabriel chime says:

    Great summary William.

    I am trying to estimate the value of my sister’s small medical practice (pediatrics):
    One doctor, two medical assistants, 3 exam rooms.

    Gross revenue is 350K, stable, slowly increasing.
    What %-age should I use?

    Cash flow is 160K, stable.
    What multiplier should I use?

    V/r gabe

    • According to my reference sources, a medical practice is valued between 35 and 40 percent of annual revenue or 1 to 3 times discretionary earnings. There are a lot of variables that could impact the valuation of a medical practice, so I would recommend a professional valuation by a respected independent firm. I can recommend one if you need to know who to turn to. My email is WilliamBruceOnline@gmail.com.

  72. James says:

    Great article! I am considering purchasing a walk up ice cream shop in shopping area in shore resort area. 11 week season with some weekends before and after. Approx. 120K annual gross sales. Approx. 45-50K SDE. 30 years in business. 7 other ice cream parlors within ½ mile. Business is mature; probably can not grow sales by much. How would you value this business for sale? Thanks for any help you can give me.

    • James, my resource says that “Ice Cream/Yogurt Shops” are valued at 60 percent of annual revenue plus inventory at cost. Hope this helps. Good luck with the project. William

  73. John Michiels says:

    Excellent article – I have a little bit different scenario. I have been approached by some university students who have developed and marketed and sold a new nutrition food bar which fits into its own area of the market. Initial sales have been excellent far exceeding the projected amount. They are internet based but been approached for distribution into markets and large chain grocery stores. We are stumpped as to their valuation presently but their idea seems to be one that could easily “take off substantially”. Minimal inventory and no real estate or capital costs presently. First year sales are about $25,000 and projected to $75,000 the second year. I am interested in providing seed money but would require a percentage of their company for the risk I am taking for say $50,000 or $100,000 . Any thoughts? – Thank you for your help

    • John, I apologize for not being able to give an informed opinion, but this kind of start-up situation is really out of my field of expertise. Good luck with the project! William

  74. Jacob says:

    Hi Mr. Bruce, Its a pleasure read your insight. What would a flower shop be valued at. Thanks in advance.

    • Jacob, florists are valued at 30 to 35 percent of annual sales including inventory. Shops with a significant number of commercial accounts will be at the higher end of this range. Conversely, those located near a supermarket with a large floral departments or near big box discounters will be at the lower end. Hope this helps.

  75. Mary Floyd says:

    Hello, could you tell me how to value a sign company/screen printing/trophy/plaque shop? Thanks in advance.

    • Mary, silk screen printing companies are valued at 40 to 45 percent of annual sales or 2.5 to 3 time discretionary earnings. The valuation of trophy / plaque shops is about the same. “Manufacturing – Signs” in my reference sources is 45 to 50 percent of annual sales or 2 to 2.5 times discretionary earning. The multiple of discretionary earning in all of the above carries more weight than the percentage of annual sales. If you need a documented appraisal, let me know. Good luck!

  76. "Eagerly Looking" says:


    Wonderful wealth of information here! I work in finance for a large healthcare org but have been eagerly searching for my an opportunity own something myself.

    Interested to know if you might have some insight into SDE multiples for architectural woodworking/cabinet/casework manufacturers. In my mind it doesn’t QUITE fall under “construction,” but is not what I would normally consider “building materials” either (though I realize these two categories are close enough and likely may be as narrow as it gets).

    After searching for three years and having seen some terribly priced offerings, surprisingly, I believe this is priced correctly (within $15k of my weighted average of previous years calc!). Would love to be able to triangulate my findings with your input!


    • Jason, I found a reference for “Manufacturing – Custom Architectural Woodwork and Millwork” which gives a valuation formula of 3 times discretionary earnings. Good luck on the project. ~William

      • "Eagerly Looking" says:

        Perfect! Thanks so much! You are doing all of “entre-hopefuls” a real service! 🙂

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  78. Randy G says:

    William I’ve thoroughly enjoyed reading all your professional insight on this topic. Curious on how the impact of social media will affect the value of the business for example; restaurants dominating the top of yelp tripadvisor urbanspoon Facebook and Google with high ratings opposed to a restaurant that has low ratings on the same social networks. How would that impact the value of the business. Is there a formula to calculate an impact.

    • Randy, the formulas for business valuation, whether it’s a percentage of revenue or a multiple of discretionary earnings, would include the effects of any advertising, including social media. It would not be an add-on to the results of the valuation formula. Presumably, the results of an effective advertising campaign would be reflected in revenue and profits.

  79. Russ Starker says:

    Hi Will,

    What are your views on whether or not receivables should be included in a small business sale, and how they should be factored in?


    • Russ, in an asset sale of a small to medium size privately held business, it’s customary that cash and accounts receivable remain with the seller.

  80. TShirt Biz says:

    Hi William,

    I appreciate your help here. We’re lucky to have you.

    1. How would the DCF multiple and revenue percentage figure change if a business was both online/e-commerce (clothing retail) and produced at least 50% of its clothing itself?

    ** The self-produced clothing was printed at a 3rd party company, but the business buys the blank t-shirt from several distributors, creates the designs exclusively, and then has them printed at a few diff. screen-printers. This in-house apparel generates appx 50-60% of the total clothing revenue (the rest being tees bought from other companies and marked up 2x). Clothing represents appx 80% of the company’s total revenue.

    2. Would domain addresses that have significant value (prof. appraised) be added to the value of the business in a similar manner as real estate/inventory?

    Thanks for your help.

    • To answer your questions fully would require a detailed valuation. In general, an e-commerce business currently will sell for between 2 to 4 times discretionary earnings which would include the website URLs.

      • TShirtBiz says:

        Hi William, thanks for the quick reply. If the URLs are not being used for current e-commerce operations (they are domains for an entirely new line of business outside of the e-commerce business: music streaming) how does that affect the equation?

      • Then they would be independent assets that could be valued / sold separately.

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  82. Scott says:

    Hi William, Do have any valuation information on Property Management Companies. More specifically, Hotel Management Companies.

    Thank you very much!


    • Scott, I couldn’t find anything specifically for hotel management, but valuation formulas for property management companies in general are:

      100 percent of annual revenues
      6 to 7 months’ revenues for firms selling under $500K
      10 to 12 months’ revenues for firms above $500K
      2.5 to 5 times SDE based on a cash sale
      3.5 to 6 times SDE with sales involving notes and/or contingencies

      Hope this helps.

      • Jon says:

        Hi William, Would you say that these numbers are still accurate in 2017? We are in talks to purchase a PM company. It is currently grossing $135,000 and the owner had made reference to wanting 3x gross, which seemed high.

      • Jon, you are correct. Three times gross is ridiculous. Three time discretionary earnings might be reasonable.

  83. Dan Wilson says:

    Hi! Can you assist me with this? I am selling a jewelry business of 20 years with 2 wonderful locations. The businesses net (EBITD) is approximately $300k a year. If I were to use a valuation of 5 times discretionary income could I add back into the asking price the market value of the Inventory and the Furniture Fixtures and Equipment. The reason I ask: Lets say a business is asking 5 times net with $50,000 in FF & E and another business with the same net has $300K in FF&E. How do you account for the difference? Am I correct, regardless, the fair market value of the jewelry would be added to the asking price (5 times net + inventory)? I am assuming the 5 times net takes into account the Goodwill. Please advise and thank you very much for the wonderful information!

    • Dan, the multiple of discretionary earnings includes furniture, fixtures, equipment, trade name and goodwill. To this you would add inventory at cost. Cash (and equivalent) plus accounts receivable usually remain with the seller.

  84. Amabel Crawford says:

    Hi William,
    This was really helpful! Do you know anything about valuing a daycare business? I’m looking into buying an existing center that is a leased property and does about 200,000 a year in tuition sales. What would be a ballpark value? What documents should I ask for from the owner?

    • Amable, my reference source says a child daycare center in a leased location should be worth approximately 45 to 55 percent of annual revenue or 2 to 3 times discretionary earnings. You would need to ask for 3 years of tax returns and an interim year-to-date profit and loss statement. If your situation becomes complicated, we’re available on a consulting basis at a modest fee to help improve the chances of a successful outcome.

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  86. Greg says:

    What is the best way to evaluate value for a dry cleaning business? I own all the equipment and the 2500 square foot building

    • Greg, dry cleaners are appraised, on average, at 70 to 80 percent of annual revenue or 2.5 to 3 times correctly calculated discretionary earnings. The age and condition of the equipment are important as are declining or growing revenue. Any real estate value should be added to the total as calculated above. Hope this helps.

  87. Are you aware of any rules of thumb for valuation of an industrial design company?

    • Vance, I couldn’t find a valuation formula specifically for industrial design. However, architectural firms are on average valued at around 40% of annual revenue and engineering service firms at 40 to 45% of annual revenue plus equipment. As a reality check, I think around 3 times correctly calculated discretionary earnings would be about right.

  88. Trish says:

    I am thinking of purchasing an unbranded soft serve ice cream business that is a Dairy Queen look alike. What valuation formula would I use for this? I can only find the franchised valuation formulas. Thank you!

    • Trish, generally the franchised operations with brand identification sell for a higher multiple than independent operations. A current Dairy Queen valuation formula is 45% of annual revenue. I would think in your case a valuation of 35% of revenue would be about right, if — big “if” — the bottom line earnings justify that valuation.

  89. rick says:


    Appreciate your article, but I can’t for the life of me determine the solution to my small business valuation dilemma. Please help!.

    My wife and I are interested in purchasing an employment agency. The employment agency, while operated independently by non-government officials, is managed by the government of Canada. Each year they are given various government contracts and they must meet the quotas identified in those contracts in order to keep those contracts. All revenue generated comes directly from the government in the form of these contracts. Any remaining revenue not allocated to operating costs is then clawed back by the government at the end of the fiscal year. Therefore revenue and expenses net to zero. We would pay ourselves a salary, but aside from being awarded additional contracts, there is no opportunity to increase revenue (and even then, there is no true profit, just revenue – could increase annual bonuses, but that’s it). Also, the contracts could be pulled/not renewed at any time. How would I go about putting a value on this business. I cannot find anything online to help.

    Any insight you can offer would be much appreciated.


    • Rick, I’m afraid I can’t be of much help here. I’ve never been involved in a situation like this. When there is a concentration of of revenue in just a few customers (or one!), business valuation experts will significantly reduce the company’s value to reflect the risk of loosing that customer. I think you would need to buy the company with some kind of “work out” plan, meaning the purchase price will be paid over time and based on benchmarks of retained revenue. Good luck with the project!

  90. rick says:

    Appreciate the reply, William. In this case, there would not be any retained revenue, as any unused revenue goes back to the government at the end of the fiscal year. The only cash that we can get out of the business comes by way of salary and bonuses. Think pseudo not-for-profit.

    I guess my real question is: Does this business have ANY value? If there is no opportunity to generate profit, does a business have value? If the balance sheet nets to zero at the end of every year (after paying salaries, bonuses and all other operating costs), does a business have value – in the sense we are discussing here…

    Thanks again William.

    • By “retained revenue” I meant the revenue of the previous owner that a new owner is able to retain going forward. I can’t really say if the “business” has any value, as I’ve never been involved in this kind of situation. My instinct is that it has little or no value. Perhaps you could buy it by paying only a small “royalty” percentage of the revenue as received to the seller for an agreed upon period of time. The most important question would be who gets to set the owner’s salary and bonuses.

  91. rick says:

    Right. So there is no “retained revenue” in that sense. The government allocates x amount to operating costs (all stipulated in the contract). So the revenue is completely tied to retaining those contracts. The business has been awarded those contracts for 10 + years, but they could be pulled at any time – so there is the potential for major risk (though they’ve gotten them for 10 years, so the risk level is debatable.)

    Your last question IS important. The owner (or director) would be responsible for setting salaries and bonuses from the pool of revenue (or budget) allocated to the business from the government.

    But do salaries factor into a business valuation? My understanding was that one does not factor in salary when doing a valuation. Really though, that is the ONLY value… A consistent salary.

    • JB says:

      Rick, I think in this instance you should take a multi-year approach to the owner’s salary+bonus (let’s call this owner’s discretionary cash flow), deducting a market rate salary for someone managing the business (as if you were in strictly a financial sponsor scenario). This should give you some proxy for the appropriate cash flow multiples.

      For instance, if the salary + bonus totals $150k, but a competent manager managing the business costs you $100k (eg, salary plus performance targets plus benefits), then $150-$100= $50k in cash flow “value.”

  92. Anonymous says:

    William, excellent blog. I am an accountant and one of my clients owns a gun shop that is in front of their holster manufacturing facility. They want to know what the gun shop is worth. I have had trouble finding information that is not shaped by political agendas. They are not looking to sell but “just want to know”. They are on the main drag in town and have only been going since 2015 but they are profitable and building inventory.

    • My best reference source says that “Gun Shops & Supplies” are valued at 30 to 35 percent of annual revenue plus inventory. Of course, this must be supported by earnings. Hope this helps.

  93. Johan says:

    Hi William, thank you so much for the insightful article. Do you perhaps have a rule of thumb multiplier for a Supplier of Butchery and Catering Equipment? Or is there any other valuation that I can use?

    Thank you so much for your help.

    • Johan, I couldn’t find any appraisal formula directly on target. The closest I could get was “Distribution/Wholesale—Durable Goods” which gives the following two valuation formulas: 4 times EBITDA or 2 to 2.5 times SDE plus inventory.

      Hope this helps.

      • Johan says:

        Hi William
        Thank you so much for this.
        Any chance that you have a rule of thumb multiplier on a shop that would cut keys and repair shoes.
        Thanks a ton for your help.

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  95. JAMES D HAMRIC says:

    Hi Mr. Bruce,
    Good article…what is the rule of thumb for a 3,000 watt FM radio station? Basically licenses, transmitter, antennae, studio equipment, etc…

    DD Hamric

    • James, these are the valuation formulas that I discovered:

      8 to 10 times EBITDA
      10 to 12 times cash flow in medium markets
      15 times cash flow—large markets
      1.5 to 6 times annual sales

      Also this was a pertinent comment by an industry expert:
      “Many sellers continue to value their property based on multiples that were in place in the mid to late 1990’s. Sadly, these valuations have dropped quite drastically in the past several years. Reality of today’s true economic picture must enter into the mindset of those who are in a divestiture mode.”

      Hope this helps.

  96. Miguel Ronde says:

    Hello William,
    What valuation would be used for the franchise Plato’s Closet? Good article by the way. Thank You

    • Miguel, unfortunately I could not find any quotes on Plato’s Closet. In the absence of any guideline, I would say about 2.5 times discretionary earnings plus paid inventory would be close.

  97. Jay says:

    Hi Will,

    What would be SDE multiple for a sandwich shop with steady 5% decline in revenues every year for the past 3 years or may even be up to 5 years?
    The decline may be because the owners have lost interest in working at the shop and have been running it largely as absentee.
    However even with the decline, the business still generates 700,000+ in revenues and a healthy profit.

  98. Apple Reseller says:

    I’ve got a bit of a twist with my question. Wondering how to value a fully Apple-authorized reseller and service provider — in other words, similar to the Apple Store, but rather than being one of their corporate-owned stores, this is “grandfathered in” from the days when Apple didn’t have their own stores, and instead relied on an independent dealer channel. This business sells and repairs the same products, but also does some B2B, in the form of onsite IT support for small businesses and individuals, as well as training to individuals and small groups. Thus, not just a retail business, but also a repair shop and tech support operation. Not just “a computer store,” but Apple. Revenue is about 45% retail, 40% repairs/service, and 15% consulting/IT support.

    Also, Apple stopped authorizing new resellers several years ago, and has all but stopped authorizing new repair providers (making exceptions only in cases of underserved geographic areas). Does that “golden ticket” status add to the business’s value?

    Finally, the reseller in question has almost 30 years of history in its primary market, and thus has a strongly entrenched, fiercely loyal customer base that often drives right past the Apple Store to come here. Thus, the value of the brand/goodwill would appear to be above-average.

    Needless to say, I’m having a bear of a time coming up with a valuation formula for this. Would love to hear your ideas.

    • This would be almost one-of-a-kind and, therefore, hard to assess. However, from what you have told me, I think a range of 3 to 5 times discretionary earnings plus inventory would be reasonable. Hope this helps.

  99. Shaun says:

    William, How are you? I am looking into buying a 4 year old Gelato business. It is not a franchise. sales were $112,000 year 1, $320,000 year 2 $325,000 year 3 and will be about $330,000 this year. Absentee owner who lets her 2 kids run the business. each make $40,000 a year but that $80,000 they make is the only profit. what value can you put on the business? What i think is right is about 2 time the $80,000. They do not own the building.

    • Shaun, I don’t have any reference citation for a gelato shop, but franchised ice cream and yogurt shops are appraised, on average, at 2.2 times discretionary earnings. As this is not a franchise operation, the multiple would be somewhat lower, so I believe your 2 times discretionary earnings would be about right. Good luck with the venture.

  100. Mark T says:

    Hello Bill, for business asset allocation do you have a simple % or formula based on initial book value to allocate to equipment for a restaurant business sale? 14 year successful, established restaurant. Obviously some equipment has been here 14 years or a little less some only 1 year or a little more. All functioning however. Just trying to get an independent 3rd party estimation for bargaining between seller and buyer. Shouldn’t really need a full blown equipment appraisal in our mind.

    • Mark:

      Here in my market, we have a new and used restaurant equipment dealer who can give us a verbal value on equipment. I would look for that in your area. In the absence of any other resource, I will take the original acquisition cost from the depreciation schedule and use 50% of that as the used replacement value.

      At our closings, we allocate the total purchase price between (1) furniture fixtures and equipment, (2) inventory, (3) training and transitional services by the seller, (4) non-compete agreement, and (5) goodwill.

      Hope this helps.

  101. Tom says:

    I would recommend to use this https://howmuchmybusinessworth.com/ valuation tool

    • Tom: This appears to be a company with which you are connected. A friend of mine weeks ago entered his info on your website for a valuation and never received a response.

  102. Joe says:

    It’s has been awhile since you updated on Pawn Shop valuation. Can you give me your comments on buying a pawnshop in Southern California (Not LA or OC counties)? What to look for and valuation to use?

    • Joe, pawn shops are sometimes valued at 3 times discretionary INCLUDING inventory. However, pricing pawnshops usually is far from the norm of a multiple of SDE, EBIT or EBITA. Typically the values that drive a pawnshop are the “money on the street” (value of the daily loans) and the inventory, with great interest in the mix of all the items that have been taken and used as collateral and the type of inventory, i.e., if a certain shop has 80% jewelry and 20% guns, tools, and electronics the inventory will be worth more than cost since gold and silver are extremely valuable. If the mix is 20% jewelry and 80% tools and electronics then it possibly could be worth less than cost due to depreciation.

  103. Elliot says:

    Hello Mr. Bruce,
    What an enlightening and informational discussion/blog you have graciously shared with us. It is greatly appreciated and well received by all!!
    Permit me to inquire as to your rule of thumb with regards for a wholesale distribution company of Maintenance Parts, Supplies And Equipment for the Multi Family Industry. Products are Air Conditioning Units and all Air Conditioning Parts and Supplies, Plumbing Equipment and Supplies, Electrical and Supplies, Lighting , Appliances and Appliance Parts, Janitorial and Hardware. The business is in operation 31 plus years, located in the Southeast. Facility is leased. Also, may I inquire as to when implementing your rule of thumb, is it applied to the latest year of financials or perhaps the last 3 year average? Am i correct in adding inventory at cost and FMV of vehicle fleet to the rule of thumb calculations? Finally, are accounts receivable and accounts receivable already included in your rule of thumb factor? I sincerely thank you in advance for your consideration in a reply,

    • Elliot, thanks for visiting and your kind words. My most authoritative resource gives a 2 to 2.5 times discretionary earnings valuation formula + inventory for “Wholesale/Distribution – Durable Goods.” No furniture, fixtures, equipment or vehicles are to be added to the formula results, only current inventory at cost. Accounts receivable and payable remain with the seller. In doing valuations, I use a weighted average of financial results with 50% weight given to the most recent year, 30 to the previous year and 20% to the third year back. Hope this helps. Let me know if you need assistance with the project. ~William

      • Elliot says:

        William, Many, many thanks for your lightning quick response. It is greatly appreciated. Best of luck in all your endeavors,

  104. Jason says:

    Mr. Bruce, long time follower of your discussions, first time poster!

    I am assessing the purchase of a meaningfully sized commercial landscaping company and would appreciate your wisdom as some guidance. The business currently does $2.5M/yr topline (+/- ~$150k) with broker-represented (pre-due diligence) SDCF at an avg approximating $350k.

    Two-thirds of revenues are on commercial contracts, with the remainder split between higher end residential (business is in eastern half of Pennsylvania if geographies have any impact) and a retail center from which they sell topsoil, mulch, pumpkins and Christmas trees, etc.

    Meaningful amount of hard assets represented (again, pre diligence), though I live in the school of thought that assets afford you the ability to generate cash flow (CF being king!), and that you don’t pay for cash flows PLUS assets.

    My many thanks for your guidance and rationalization in advance!

    All the best,

    • Jason: This sounds like a good opportunity if – big “if” – the seller does not have unrealistic price expectations. I found on our resource materials three rules of thumb for valuation: (1) 1.5x SDE; plus fixtures and equipment (except vehicles) & inventory, (2) 45 – 50% annual revenues plus inventory, and (3) 2 – 4x EBITDA (may be higher for larger firms).

      Theoretically, if the business is producing the average bottom line results for its peer group, all three formulas should produce about the same valuation.

      Separating out the retail garden center income/expenses (if possible), the following formulas would apply: (1) 3 – 5x SDE plus inventory, and (2) 25% sales plus inventory.

      Hope this helps. Let me know if you need a formal written, documented appraisal. We also provide a buyer’s consulting service.

  105. Pingback: Considering Buying a Business of Your Own? Here’s a List of the Most Frequently Asked Questions and Responses by William Bruce. | William Bruce on Business: A Discussion

  106. Jason Bowne says:

    Hi William, a returning reader seeking your further wisdom!

    I have come across an interesting listing; it is a sporting goods brand focused on the cycling industry, they design their own products and accessories (outsourced mfg, so very light assets though they do own several patents). To date they have sold almost entirely by word of mouth and organic traffic to the website.

    Not including inventory, asking price is right at 3.0x cash flow. They currently only sell into a certain niche within the cycling industry and are a two-person operation doing less than $1M in gross revenues.

    It’s not that I think asking price is egregious, but the operation feels a touch “lightweight” for the multiple. Any potential guidance on a (quite) small business like this?

    Many thanks again!

    • Jason:

      Thanks for stopping in. It’s true that the multiple goes up with volume, but in this case with patents and what I would assume is a potential for growth with a marketing effort, I think 3 times CORRECTLY computed discretionary earnings (cash flow) would be reasonable. Let me know if you think we might assist. ~William

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  108. Nora Robison says:

    Thank you for this info. We have been in business since 1985 and now would like to retire and sell our business. Its been hard though to know how much to ask for.This will give us something to work with. We are in a very small town and its going to be harder to sell Im sure. Thanks for the info!
    Nora Robison

  109. Al Schlimm says:

    Will, I own a direct hire (permanent hire) executive recruitment firm and am planning to sell to my younger partners. What would the multiplier or percentage be for this business? Thank you. Al

    • Al, thanks for stopping by. My most authoritative resource says 2.17 would be an average multiple of discretionary earnings, or 52 percent of gross annual revenue. In both cases, my source notes that earnouts may be required. Generally, earnouts are based on the future performance of the business with payments from the buyers to approximate the initial valuation. If you need a written, fully documented valuation for the transaction, let me know. Best wishes, Will.

  110. Fred Palmieri says:

    William, Great site. I’m a CPA working on a business evaluation for of my clients who is a secondary market lender. He has $38.5M A/R generating $3.9M in gross revenue & $3M net revenue. His EBITA is $3.7M. Between my 12 mo trailing & weighted avg method I’m arriving at between $14M-$16M valuation. Does this sound right to you? Thanking you in advance,
    Fredric Palmieri CPA

  111. Al Conde says:

    Hello William,
    We owned a franchise residential cleaning company and we just start thinking in selling it. The revenue is around $890,000 and the SDE is $75,000. I have not be able to get good information from the Business Reference Guide. Based on your experience, what the SDE multiplier and the percentage of the gross annual revenue should be. Thank you! Al.

    • Al, thanks for stopping by. My latest resource guide gives valuation formulas of 58% of annual revenue or a multiple of 2.07 times discretionary earnings. The multiple of discretionary earnings alsays has more credence than the percentage of revenue. Hope this helps.

  112. Jerry says:

    HI William,

    Just found your website, really appreciate all the information! I’m looking at purchasing a specialty retail clothing store, gross annual revenues are about $500k, with net profits around $100k. They’re asking $300k for the biz which includes current inventory. Is this a fair valuation/ask? Thank you!

  113. Fred Palmieri says:

    Hello William,+
    I’m A CPA working on an update of a business valuation for a lending institution that is not a major bank. It is privately owned and provides mostly bridge loans to businesses & capital for real estate investors. They have been in business for close to 20 years & I’m not totally clear on the most accurate multiple to apply to their EBITA. The software available on the internet seems to value the industry @ 4.25 while the 2023 BRG business reference guide seems to value commercial banks @ 14 to 22. Although my client isn’t in the sense a commercial bank, should my value be somewhere in between or is 4.25 closer to the truth. Their weighted average figures for 3 yrs are $1.9M & their trailing 12 months figures for 2022 are 1.5M. With a 4.25 MOE my value is between 6.3M & 8M. Their gross revenue was 1.7M last year & is down from 2.9 last year & 3.9 the year before. Does this valuation make sense? Is there a rule of thumb I can apply to somewhat proof the sanity of everything here? I want to be as accurate as possible Thank you in advance FRED P CPA

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