3 ms·
A small business owner will say he makes $400K profit a year, but wants to sell it for $2M (5 times $400K). What he doesn't tell you is that $400K includes his
by raincom 4y ago
A small business owner will say he makes $400K profit a year, but wants to sell it for $2M (5 times $400K). What he doesn't tell you is that $400K includes his salary. As an owner, one needs to spend 60 hrs a week to run such a business. Here, $400k is just the salary for oneself to run that business. No profit left.
The people who have means to buy such a business (like the bay area tech people), don't want to buy such businesses, because there is no upside. The people who want to run such a business (say, a security guard working for Pinkerton), don't have the means to buy such a business.
- Danieru 4y agoYou've hit the nail on the head. Small business valuation is hard and surprising. Almost by definition a small business has not been systematized and abstracted. The owner is vital to the operations. This is in strong contrast with medium or large businesses where a professional management layer exists. Thus allowing the owner, even if nominally the CEO, to relax and ignore day to day operations. Thus small business are best through of as a job, not an asset.
- ZephyrBlu 4y ago5x profit for a small business seems a bit high unless it was really stable.
- raincom 4y agoI agree with you. Retiring owners of small businesses seems to want 5 times the profit, even though he appears to be listing for 3 times the profit. Once you go through the books properly, that's what happens.