How long should it take to recoup cost of buying existing business

[tolovefromANFIELD]

Originally Posted by Mattks

I don't know think that is what they are saying. There are instances where intangible assets do have a financial value, but most of the time it's probably not true. It doesn't have anything to do with revenues or profits.

Intangible Asset Definition | Investopedia

One example of a intangible asset with value is a local restaurant in my city that has been around for 90 years. They have been on national television and all sorts of food tv shows. Their brand does have a real value. My restaurant on the other hand has no brand value. Most businesses have no value for their brand, or business strategies. Most businesses do not have patents or copyrights.

Edit: anyone else with examples of an intangible asset or good will with real values?

Quite a few service based businesses will almost always have most of their value tied up in goodwill and/or other intangible assets.

[TaxPhd]

Originally Posted by oregonwoodsmoke

You make it sound like you would only pay for the hard assets. There might be a business that generates half a million a year and the only assets would be an office lease and 2 fax machines. You are not going to be able to buy that business for the depreciated value of 2 fax machines. Not when other people are willing to pay based upon the amount of income the business generates.

I'm not saying that, and there is nothing in my post that could have logically led you to that conclusion. I was simply explaining what goodwill is.

[atltechdude]

This is a good page on this topic:

How To Value A Business

The basic rule of thumb for small businesses at least is 1-3x net yearly cash flow (i.e. not including any owner salary in expenses).

Put another way, this means it would take you 1-3 years to recoup the investment depending on what multiple you paid if the business neither grew or shrank and had the same yearly profit.

[tolovefromANFIELD]

Originally Posted by atltechdude

This is a good page on this topic:

How To Value A Business

The basic rule of thumb for small businesses at least is 1-3x net yearly cash flow (i.e. not including any owner salary in expenses).

Put another way, this means it would take you 1-3 years to recoup the investment depending on what multiple you paid if the business neither grew or shrank and had the same yearly profit.

The article you referenced is not bad. But, the author still harps on Seller Discretionary Earnings, past performance to determine a multiple.

Let me give you an example:

a.) Two firms doing the same thing
b.) Both with $2M in Sales
c.) One firm has SDE of $400,000, the other has SDE $100,000

Which one would you buy? Per Author's own valuation formula we come up with an SDE multiple of three, which makes one them worth $1.2M, and the other one is worth $300k. What if you couldn't get the owner of the firm with smaller profit to come down to no less than $600k? That is six times SDE!

Which is a better buy?