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Business Valuation: What's it Worth

Not every business needs to hire a professional business valuator. For small firms with less than $1 million of SDE (Seller's Discretionary Earnings) certain rules of thumb may be applied. For example, a retail store with $600,000 of SDE might trade for $1.5 million plus inventory. What is the worth of performing a business valuation in that instance?

The properly conducted business valuation is useful to the seller for at least the following reasons:

  1. Identifying off balance sheet items, such as IP, which create more value than the rule of thumb metrics.
  2. Analyzing the supportable discretionary expenses (adjustments) that should be added back to the SDE or EBITDA.
  3. Establishing a negotiating position with a buyer based upon an outside, expert's opinion.
  4. Reflecting the importance (or lack thereof) of the owner to the near-term continued success after the purchase.
  5. Determining the realistic working capital needed to operate the firm, as well as any excess cash available to the seller.
  6. Assessing the impact of retaining the key customers offset against the risk of customer concentration.
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