| Correctly Pricing A Business Is Important
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| | demand is reflected in a fairly strong
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| If You Really Want To Sell It!As a
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| | multiple. A lot of buyers want, for
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| consultant I talk to many business
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| | example, a well-established franchise, or
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| owners, brokers, and agents on a daily
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| | a grocery store with a long lease in a
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| basis about valuing businesses. It always
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| | densely populated area and little direct
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| amazes me on how some of these
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| | competition. Its multiple might be in the
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| individuals come up with the values on
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| | range of two to three times annual
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| small businesses being sold. No wonder
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| | adjusted net income.A one or two
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| only 30% of all businesses sell! In many
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| | multiple, on the other hand, would be
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| instances no consideration is given to
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| | associated with an enterprise in which
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| the total picture - like will the
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| | the buyer is assuming greater risk. An
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| available cash flow of the business be
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| | example is a retail store near a large
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| able to pay the debt of a loan, will the
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| | shopping area, which leaves the buyer of
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| deal as structured or priced even be
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| | the smaller business vulnerable to the
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| attractive to financing sources, "cash"
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| | competitive marketing activities of much
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| price vs. "note" price and how these
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| | larger companies. The lower multiple is a
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| factors figure into the equation!I have
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| | consequence of lower market demand. Fewer
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| seen many "professional valuations" where
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| | people want that kind of business.Since
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| the price just doesn't make sense - and
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| | profitable distributorships and
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| sellers wonder why their business for
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| | manufacturing companies are much sought
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| sale just sits there with no
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| | after, it's not unusual to see them
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| action!Market ApproachThere is a solution
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| | command a price upwards of four times
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| that is grounded in the fundamentals of
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| | annual adjusted net profit. The company
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| economics, and time tested in the
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| | in this category providing adjusted net
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| marketplace, where the influences of
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| | profit of $200,000 might realize a
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| supply and demand ultimately determine
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| | selling price in the range of $800,000,
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| where a business belongs on the price
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| | assuming a favorable deal structure (more
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| scale. One economist explains this market
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| | about that shortly). Also warranting a
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| approach by comparing a business to a
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| | high multiple are businesses loaded with
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| machine which has the purpose of making
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| | assets-equipment, trade fixtures and
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| money: The more money it makes, the more
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| | inventory. But remember that a seller
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| it's worth. And that explains why, for
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| | must be able to establish the company's
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| example, there is a strong demand for a
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| | "history of earnings" with financial
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| very profitable distribution business
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| | reports and tax returns, before the
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| with few hard assets; and why it is worth
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| | higher price will be offered.More
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| more in the marketplace of available
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| | commonly available businesses, such as
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| businesses, than a large machine shop
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| | restaurants, are priced with a lower
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| that would cost nearly $1 million to
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| | multiple - in the one to two range - to
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| duplicate, but can't make a living for
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| | reflect the abundance of this kind of
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| its owner.Adjusted Net IncomeThe first
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| | business available for sale at any one
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| category of information needed is called
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| | time. In this case it's purely a matter
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| adjusted net income, and is the total
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| | of supply and demand.And a company in any
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| amount of cash produced by the "money
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| | industry that is difficult to finance,
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| machine." It's a figure that includes the
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| | will be hard to sell. I'm familiar with a
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| profits, the owner's salary and all of
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| | retail business in Northern California
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| the many cash-related benefits which are
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| | that is not generating enough adjusted
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| enjoyed by the principals of small
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| | net income to support its $1.5 million
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| businesses. Those benefits can include
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| | asking price. Because a new owner would
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| the use of a company car, the
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| | have a difficult time paying off a loan
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| company-paid premiums for health, life
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| | that was hefty enough to swing a purchase
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| and auto insurance, plus personal
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| | of this company, there are no lenders
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| expenditures tucked into travel and
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| | willing to provide the money. That
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| entertainment, subscriptions and similar
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| | severely affects marketability. In fact,
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| business "expense" categories. Interest
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| | the company is probably unsalable as
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| expense should be added to adjusted net
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| | presented.Importance of Deal Structure
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| income, along with accounting
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| | TermsAnd the final factor thrown into
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| entries-such as depreciation and
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| | this equation is particularly useful in
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| amortization-that can divert money to the
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| | determining the value of businesses
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| owner's pocket so that it never appears
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| | offered for sale. It recognizes that the
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| on the bottom line of the P & L.While
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| | terms of a transaction--in other words,
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| some of these items vary from business to
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| | how a price is paid--are critical in
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| business, any owner knows which
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| | calculating that price. When sellers
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| categories of expenses in his or her
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| | demand all cash for their businesses, for
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| financial records include sums of money
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| | example, the market tells us that they
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| that should be added to adjusted net
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| | can expect to receive about 60% to 80% of
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| income. Many business owners also know of
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| | the sum they would have gotten by taking
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| cash income that never sees the business
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| | a down payment and financing the
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| records in any way, shape or form. Some
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| | balance.It's easy to understand why deal
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| owners feel they should get credit for
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| | structure is such a vital component in
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| these sums in the calculation of value.
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| | the valuation process. For a business to
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| But it's a poor policy to collect
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| | be affordable, the cash flow needs to be
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| unreported income and then attempt to
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| | substantial enough to support the price
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| have it included in adjusted net income
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| | at the multiple being used. A deal that
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| for evaluation purposes. When selling,
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| | requires a lot of cash up front, in
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| your buyer prospects want any statements
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| | relation to the expected amount of
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| you make about your business to be
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| | adjusted cash flow, will place a greater
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| supported by evidence in the form of
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| | burden on the buyer. That principle,
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| accounting records and other reliable
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| | translated into the language of the
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| sources. To admit that you are doing
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| | marketplace, means the business will only
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| business "off the books" not only exposes
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| | be appealing at a low price. If, on the
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| you to problems with the IRS, it also
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| | other hand, the level of adjusted net
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| sets a bad tone with prospects who-if
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| | income supports the buyer's ability to
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| they are going to be interested in your
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| | make payments to the seller in order to
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| business-- need to believe your practices
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| | purchase the business-this opportunity
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| and record keeping are above
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| | will interest more potential buyers and
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| reproach.Adjusted net income is usually
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| | the result is a higher achievable sales
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| the first thing any buyer wants to know
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| | price.Other ways an attractive deal
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| about when investigating a business; and
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| | structure can be used to build market
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| not just the past few months' worth of
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| | appeal include a delay of a few
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| income. A seller should be prepared to
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| | months--after close of escrow-- before
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| demonstrate a history of earnings, and
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| | monthly payments on the seller's
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| have the documentation to back it
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| | financing are due to begin, a low
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| up.Multiplier MethodThe next piece of the
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| | interest rate, and interest only payments
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| equation comes from the expectations
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| | for awhile, until a new owner is able to
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| working in the marketplace to shape the
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| | build the business to more easily meet
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| multiplier-a figure which will be
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| | the loan obligation. Creative deal
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| computed, along with the cash flow, to
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| | structures always help sell a business
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| calculate a rough value. The validity of
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| | and will usually command a higher market
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| the multiple is that it reflects behavior
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| | price for the business (remember it has
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| in the market. There is no need to
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| | to make sense)!Pricing a business is as
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| theorize about a proper multiplier. It's
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| | much or more of an art than a science.
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| calculated by determining what people
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| | Sellers who take a look at the big
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| actually pay for small businesses in
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| | picture - looking at both deal structure
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| California.The experience with low risk
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| | and price are usually the ones who are
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| businesses is that their high market
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| | successful in selling their business!
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