Small Business Valuation - Doing a Business Valuation on the back of an envelop?

It may come as a surprise to learn just how many business brokers price small businesses for sale and business valuation is often written on the back of an envelop.

The business valuation method following is used by business brokers to determine an asking price for a small business; it is based on the adjusted net profit using the most recent profit and loss statements.

The business broker will look at all the business expenses to see what they can 'add back to profit'.  This is referred to as add backs or recasting.

The adjustment is made by adding back to the net profit all the non-essential or discretionary expenses, not necessary to run the business, to show a more accurate net cash flow for the owner.

The business may also have unaccountable expenses - in this case it would be adjusted down.  Once this number is determined, the next step is to get the envelope and pen then the business broker will multiply the adjusted net profit, usually by 2.5 times and they have an answer.

As you can plainly see, business valuation, using this method doesn’t make a great deal of sense and frequently has devastating results for small business buyers and sellers............but it is easy.


Some business brokers may even mention rule of thumb, but as one very wise business valuation practitioner suggests - 'thumbs come in many sizes'. 

The best thing to do is ensure you have a comprehensive small business valuation tool and step by step instuction for an accurate business valuation.