If you decide to buy a business and you’re reviewing business for sale sites or visiting with business brokers how can you decide the price range of small businesses to look in? There are many “scientific” methods for how you determine the value of a small business but in reality there are only a very small number of variables. Here is the information needed to determine the value:

1. Do you plan to work full time in the business? This is important because we have to adjust the biz earnings down for the value of your services.
2. What’s the minimum income you need to earn from your small business? Really, the minimum!
3. What is the EBITDOC earnings of the business? (EBITDOC stands for earnings before interest, taxes depreciation and owner’s compensation (salary and perqs)
4. How much do you have available for a down payment before you borrow money from anyone else?

Here’s your formula using above numbers as identifiers:

3 – 2 = cash available for debt service (CADS)

(CADS/12) divided by 12 x 1000 = amount of debt that can be serviced. Add that to your down payment available and you have your business purchase price.

Example:

EBITDOC + $100,000

Amount you need to make per year  $70,000

Amount of your down payment = $60,000

CADS = $30,000 ($100,000 – $70,000)

CADS per month = $2,500 ($30,000/12)

Amount of debt that can be serviced with a $2500/month payment = $200,000 (10years at 8%)

Debt capacity $200,000 plus your down payment amount $60,000

Small business you can afford $260,000! Start your search by looking at businesses that are priced 15% above or below this price.

These are estimates. Before making any decisions seek advice of licensed CPA and investigate terms of any loans thoroughly.