Updated: Jul 11
Here is a generic set of Income Statements and assume in this case the seller wants $599,000 for the business. Assess how you think they came to this amount, an explanation is given further below.
In this case the assessed value is the most recent full years owners benefit of 178,531 uplifted by the current sales growth of 4% in the current partial year (6 months) and then multiplied by a factor of 3x.
I.e. 178,531 x 4% x 3 = 557,017 so 599,000 as a starting negotiating point.
The businesses profit before any tax is taken and then successive add backs are made to determine the owners total benefit from the business.
The owners salary is added back if it's part of the income statements salary cost. In this case 60,000.
Depreciation is generally added back as it's a non cash item, however, logically a provision has to be made for replacement assets, although general small items are often expensed directly in the maintenance expense line.
Interest costs are added back as they are created from any financing in place. As they are not directly attributable to the underlying operations they are added back. Going forward however, if financing is required to fund the acquisition, then this will need to be considered as a demand on the cashflows of the business.
Other costs could additionally be added back as owners perks charged to the business. In this case the 'International Travel' could be a yearly trade exhibition that is taken as a holiday destination.