Lee Reisinger6-19-2011

If you want to buy or sell a business, what factors are considered to determine its value?

◦ Price/Revenue Multiple

◦ Price/SDE Multiple

Price: Sales price of business paid for intangible assets (goodwill, location, patents, licenses, customer lists, etc.), furniture, fixtures and equipment

Revenue: Net SalesThe amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed. The sales number reported on a company's financial statements is a net sales number, reflecting these deductions.

Typical is 0.3 to 0.6

Highest multiples >1◦ Coin operated laundries,

◦ Car washes

◦ Accounting/bookkeeping services

◦ Home inspection service

◦ Newspaper delivery service

SDE: Seller’s Discretionary Earnings is net income before:◦ Primary owner’s compensation

◦ Other non-recurring income or expenses

◦ Depreciation

◦ Amortization

◦ Interest

◦ Taxes

Typical range from 1.5 to 2.5

Highest > 4◦ Gas distributors

◦ Video production

CitiKitty--$100,000 for 15%

Pass on Voyage Air Guitar

Stamps & Martin t-shirts--$50,000 for 15%

Jewelry--$180,000 for 45%

Wenzel--$500,000 for 20% convertible shoes http://abc.go.com/watch/shark-

tank/SH559076/VD55126456/week-8?rfr=google

http://www.bing.com/videos/watch/video/week-8/17wz5b5au?q=shark+tank+full+episodes&FORM=VIRE3

Cash

Accounts receivable (really receivable)

Inventory (fairly valued)

Real estate

Other tangible assets

Subtract: Liabilities being incurred with the purchase

Commercial Bakery with:◦ Annual net sales of $1,000,000

◦ SDE $250,000

◦ Equipment worth $200,000

◦ Donuts worth $5,000

◦ Accounts receivable of $120,000

◦ Bakery building valued at $250,000

◦ Taxes due of $15,000

◦ Donut truck worth $15,000

◦ $500 in the till

◦ Loan of $150,000 you would assume

Assume 0.4 Multiple, mid-range

Price is $400,000

5,000 Donuts

120,000 Acct’s receivable

250,000 Building

500 Cash

-150,000 Debt

$625,500 Valuation

Assume 2.4 Multiple, mid-range

Price is $600,000

5,000 Donuts

120,000 Acct’s receivable

250,000 Building

500 Cash

-150,000 Debt

$825,500 Valuation

Range from $625,000 to $825,000◦ Which one is right?

What other considerations are there?◦ Projected earnings

◦ Ideas you might have

◦ Problems you anticipate

◦ Synergies with other businesses

◦ How should these factor in??

Entrepreneurs get asked questions about ◦ Earnings

◦ Sales

◦ Projected sales/earnings

Shark Tank investors have valuation models in mind and fit with their capabilities

Let’s watch

Belt Buckle—Hollywood Washed Up◦ http://www.youtube.com/watch?v=7C0LP1ehmVk&

feature=related 10 min

Natural Soda◦ http://www.youtube.com/watch?v=UDheVH21FMM

&feature=related 8 min

Element Bars◦ http://www.youtube.com/watch?v=BJ-

zSDjJsPQ&feature=related

◦ http://www.youtube.com/watch?v=wt0_9AW3O2c&feature=related