How Much Should You Pay For A Business? The Blended Valuation Approach

How to use a "blended" approach in estimating the value of a business

Here's a way to get a quick estimate of the value of a small business. A small business in this case, is defined as having less than $1m in revenues.

I use three different data sources for comps and three years of adjusted earnings. This seems to be the "magic" number to help us give a business owner a realistic estimation of value of a business without doing a formal valuation. A formal valuation would take at least a week to do and have a fixed cost to the owner.

I use a simple spreadsheet to lay out the three years of Profit and Loss numbers. I then add back the owner's salary, discretionary and non-recurring expenses. This gives me the adjusted earnings for each year. I then take the average of these three numbers and use this to calculate three different values from the three sources of comps.

When looking at the comps I take the average value from each of the three sources of comps. This provides a reality check to both myself and the owner and eliminates any extreme values. It also gives a wide enough view of the market values so we are confident we have at least identified a good range of value for the business we are analyzing.

This valuing a small business information was provided by: George Arabian at VR Business Brokers of San Francisco, California.