26 Jan Common Sense Approach to Business Value
Comments from Tom West:
Cleaning out some old files revealed a very practical approach to pricing main street businesses. The creator of the following was Bill Womack, an old-time business broker and I should add – a very successful one. This take on pricing small businesses is about as practical and down-to-earth as it can get.
1) Compute the SDE (example $85,000)
2) Allocate 1/3 of SDE for annual debt service ($85,000/3 =$28,333 per year for debt service
3) Reduce to monthly $28,333/12=$2361.11, this is the monthly payment including interest that the deal willstnd).
4) Determine interest rate SBA loans @ +2 over prime, prime = 8%, loan at 10%.
5) Determine the “Window of Occupancy”, if a landlord will give a 4-year lease with a 3-year option that is a 7-year window of occupancy, therefore we can have a 7-year note.
6) Look in the amortization tables for 10%, 7 years and $100,000. That payment is $1660.12. Do the following ratio:
= X = the loan amount
X = $142,000 note payment
7) Determine the down payment by SDE X 2/3 = Buyer’s standard of living & down payment ($56,666
8) Sale Price is down payment ($56,666) + note $142,000) = $198,000.