Most businesses valued under $2 million dollars fit into the category of "buying a job". BTW, there is nothing wrong with buying a job. And if you as the buyer can grow the business to eliminate the need for the owner to show up every day, then the business will be worth more. The challenge is growing a sustainable business and reaching that size. Many think they can and not all can/will do it.

At $2 mill, it has around $700k cash flow, which is not what I would consider "buying a job" territory.

No matter how much the earnings are, if a buyer works full-time in the business filling a needed role to keep that $700,000 coming in, you are buying a job.

With $700k net, I'm pretty confident you can find someone to hire and fill the role vacated by the owner. Much different than a $150k net business where there is not enough for both an absentee owner and a new hire to manage the business.

Sure, you can do that. The question is: will the business cash flow stay the same, decline, or grow? As the owner, you'll want to be involved to some degree to manage the process. When the company is large enough to have professional management, and the owner doesn't show up on a regular schedule, its a different situation. A company with $700,000 in cash flow is not there yet.

I don't buy a business unless there is an opportunity to grow/scale and believe if you are working "in" the business, it becomes difficult to work "on" the business. I agree it would not be a professionally managed, but wasn't alluding to that. I just don't think $700k net is a "job replacement."

Maybe. Maybe not. It really depends upon the circumstances of the buyer (and seller).

Most sellers don't want a partner. They want to exit. What the seller in this expample needs is a good advisor to tell him the truth about the value of the business. Then the seller needs to accept that truth and either 1) keep and grow the business to improve the value so he can get the price he wants or 2) sell the business at the current value and move on.

I agree with you. My point being, the broker needs to be as realistic as the seller, in terms of what it takes to get the business sold.

Most good professional business intermediaries advise their client (the seller) before going to market regarding the price and likely deal terms. There are two kinds of "business brokers": 1) list everything at the price the seller wants and hope that the seller comes to reality before the listing expires, or 2) those who take fewer listings and price them appropriately based on proper valuation techniques. Its tough to sell any business even with the "right" price and deal terms. Those who list a business without understanding the financials and advising the seller appropriately are doing a disservice to the business owner and to themselves.

Good business brokers that last have to SELL businesses NOT list them. You don't make money LISTING a business. Pricing the business right is the only way to SELL. The challenge is helping the seller and buyer understand the deal points.

I can't stand the 2x plus inventory rule of thumb. Inventory has little value if it isn't sold to create cash flow (SDE). Tell me a business with $1 million in inventory and $100k in cash flow is worth $1.2 million? Either you are the best salesperson ever, or you just found a high net worth buyer with a lot of disposable money. Both are very low probability... This dovetails into the comment above re: sanity test when valuing a business.

Same thing applies to businesses with high asset value and low cash flow. A machine shop with $1 million in iron on the floor and $100k cash flow is NOT worth $1 million. Educating sellers is paramount. I have walked away from plenty listings like this example. Especially when I hear them say "Well what about goodwill?" Goodwill is a function of value beyond yous asset value created by cash flow multiples in excess of asset value.

I will argue with the premise of a 5 year note on this business acquisition. Generally SBA financing (almost a guarantee for a business this size) is 10 year. That obviously changes the debt service quite a bit. I would also argue with not including owner comp in the available cash flow for debt service. EBITDA plus (a single) owner comp is a basis for value in the small business market. Then you have to analyze a prospective buyer's lifestyle expense plus debt service on the business to see if it's a good fit. I go through this analysis with all my prospective listings to make sure they understand what they can expect re: value and (most importantly) WHY they can expect that. Hard to argue with that math. At least logically.

Based on available information, I would have listed this business somewhere between 2-2.5x multiple ($400-500k) including inventory AND let the seller know the value might be lower depending on the actual involvement of the seller in the business. Yes, that might be close to the value of the inventory, but at least the seller gets to exit at once, and not have a protracted exit. Then it's up to the seller to let me know if that fits their goals.

To me it seems this broker is either young in the business and/or needs education on how to value a business appropriately. Find a mentor.

^[redacted]‌ thanks for your insights. With a price at the midpoint of your range ($450k) and borrowing 80%, the debt service would be roughly $50k per year ($360k @ 6% amortizing over 10 years), which leaves $150k per year for compensation, reinvestment in the business, and a return on the $90k of equity. Those economics are much more reasonable.

My primary takeaway from a valuation perspective is that 2x SDE plus inventory might work if inventory is $50-100k (0.25x SDE or 0.50x SDE) but definitely doesn't work if inventory is $440k (2.2x SDE).

I think it's also important to remember that, just like in salary negotiation, it's not about what one side needs/wants, but what the deal or job is worth.

This is so true, and exactly why sellers need to be educated prior to going to market what buyers look for and look at. And it's also why it's so important to get information from a buyer prior to introducing an opportunity, so you understand their requirements. Intermediaries are matchmakers, and you can't make a good match without knowing on both sides.

BTW - I still argue that a 5 yr term and debt service of $167K/yr is not representative of the norm for a deal this size. Though I will agree that even at 10 yrs this deal doesn't work.

I think it depends upon the circumstances. If the owner wants to retire or is ill, or has other life circumstances such as a partnership breakup or divorce that prohibits him/her from continuing to operate the business, then an exit is what is needed. Yes, the value of a main street business is often only 2 to 3 years earnings. Unfortunately, many small business owners don't understand this until they reach the time they want to retire and are out of energy and in some cases, time, to change those circumstances. So the options are work until they die in the business or sell now. If they sell, hopefully they have other retirement resources. Also, keep in mind that many buyers of main street businesses (which this one is) WANT to buy a job because they are tired of working for someone else in a corporate job. Or perhaps they don't have a job because of a layoff and want to be in control of their destiny. There is nothing wrong with buying a business for the purpose of having a job. These small businesses employ the majority of people in this country according to the SBA.