Mergers & Acquisitions:

Business Valuation

Pricing the Business

Buying a Small Business: procedures for structuring transactions, negotiations and settlements


By Meir Liraz, CEO, BizMove. Used by permission.


Buyer and Seller: Different Perspectives

Determining the value of a business is the part of the buy-sell transaction most fraught with potential for differences of opinion. Buyers and sellers usually do not share the same perspective. Each has a distinct rationale, and that rationale may be based on logic or emotion.

The buyer may believe that the purchase will create synergy or an economy of scale because of the way the business will be operated under new ownership. The buyer may also see the business as an especially good lifestyle fit. These factors are likely to increase the amount of money a buyer is willing to pay for a business. The seller may have a greater than normal desire to sell due to financial difficulties or the death or illness of the owner or a member of the owner's family.

For the transaction to come to conclusion, both parties must be satisfied with the price and be able to understand how it was determined.

Factors That Determine Value

The topic of business evaluation is so complex that any explanation short of an entire book does not do it justice. The process takes into account many, many variables and requires that a number of assumptions be made. Shannon Pratt, a noted business valuation expert, names six of the most important factors... More

Rule-of-Thumb Formulas

The rule for using rule-of-thumb formulas for pricing a business is don't use them. The problem with rule-of thumb formulas is that they address few of the factors that impact a business's value. They rely on a "one size fits all" approach when, in fact, no two businesses are identical.

Rule-of-thumb formulas do, however, provide a quick means of establishing whether a price for a certain business is "in the ballpark." Formulas exist for many businesses. They are normally calculated as a percentage of either sales or asset values, or a combination of both.


Using comparable sales as a means of valuing a business has the same inherent flaw as rule-of-thumb formulas. Rarely if ever are two businesses truly comparable. However, businesses in the same industry do have some characteristics in common, and a careful contrasting may allow a conclusion to be drawn about a range of value.

Balance Sheet Methods of Valuation

This approach calls for the assets of the business to be valued. It is most often used when the business being valued generates earnings primarily from its assets rather than the contributions of its employees or when the cost of starting a business and getting revenues past the break-even point doesn't greatly exceed the value of the business's assets.

There are a number of balance sheet methods of valuation including book value, adjusted book value, and liquidation value... More

Income Statement Methods of Valuation

Although a balance sheet formula is sometimes the most accurate means to value a business, it is more common to use an income statement method. Income statement methods are most concerned with the profits or cash flow produced by the business's assets. One of the more frequently used methods is the discounted future cash flow method. This method calls for the future cash flows (before taxes and before debt service) of the business to be calculated using the 4-step formula... More


Small Business

Factors That Determine Value

Balance Sheet Methods of Business Valuation

Income Statement Methods of Valuation

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