A basic principle of pricing a small business revolves around the cash the owner receives from the operation of the business.  Often businesses are priced based on a multiple of cash flow: a “rule of thumb”.

In reviewing a business’ historic cash flow, it is important to take into account one-time-events, both good and bad.  For instance, the expense of a casualty loss, a move, unusual litigation, or the replacement of a major piece of equipment should be added back to arrive at a “normal” cash flow.  Similarly, the impact of non-recurring, positive events such as an unusually large sale, an insurance settlement, sale of a major asset, or relief from some obligation should be deducted to arrive at a “normal” cash flow.  Generally speaking, the multiplier should be applied to the cash flow that a new owner can reasonably expect without unusual, one-time influences.

Remember also that while price is important, so are the terms. Usually, the lower the down payment the higher the price; the more cash is put down the lower the price.

Your professional business broker can assist you in evaluation the cash flow from a business and also provide information on how small businesses are priced.