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Compensation Dollars vs Investment Dollars

I didn’t know whether to laugh or be insulted. While I love it when a potential client does their homework, there is nothing more frustrating than when they have an advisor who is in over their head.

I recently had dinner with a business owner interested in 让我把他的生意卖掉. His business was smaller than I normally handle, but I met with him in response to a request from a mutual friend.

When I got to the restaurant I met the business owner and his son (we’ll call him Ed). The owner told me he was ready to retire and start traveling. I asked him how much he wanted for the business, at which point Ed chimed in, “We’ve done our homework, we think the business is worth $1.2500万年.” I had no frame of reference as to the size or profitability of the business, so I asked Ed how he got to that number. He explained that his dad’s company generated an EBITDA of $250,000年和, 根据他的研究, he determined that companies like his dad’s should sell for a multiple of 5, 因此1美元.2500万年估值.

I know Ed had his dad’s best interest at heart. I certainly didn’t fault him for pushing the envelope to get the most he could for the business. 然而, 随着我对业务的了解越来越多, I realized there were two critical errors in Ed’s financial logic that led me to conclude he wasn’t as well prepared as he represented. Mistake number one: the EBITDA did not include a deduction for rent since his dad owned the building from which the business operated. Mistake number two: the EBITDA did not include a deduction for compensation for his dad.

To be clear, Ed was correct in believing the business generated $250,每年000 for his dad. 但250美元,000 is not the annual investment value of the business because it does not include the full cost to operate the business. 让我这样来解释. 一旦生意被卖掉, we assume the 卖方 will expect the buyer to pay rent, 估计为50美元,每年000, 所以调整后的EBITDA现在降到了200美元,000. The buyer will also want to be compensated for the work to run the business or pay someone to run the business; let’s say the market comp to run a business like this would be $125,000. This brings us to an adjusted EBITDA of $75,000, which is the investment value of the business. 大多数企业都是这样的, 在这个尺寸, would sell for a multiple of 3 to 4 times EBITDA, 所以公司只值225美元,000 to $300,000.

让我向你保证, it is a hard conversation to tell an owner their business is worth 25% of what they thought coming into the meeting. That’s why I go to a lot of effort explaining my logic. Once an owner (and their advisor) understands the difference between compensation dollars and investment dollars, 他们通常接受结论. In my many years of having these conversations, I’ve noticed this confusion is especially acute for small professional businesses (doctors, 律师, 会计师, 按摩师, 牙医, 等.). Compensation dollars to run the business cannot be add backs when calculating the investment value of a business. 我知道艾德是好意, but had he learned this valuation lesson a few years earlier, he might have been able to help his dad reach a better exit outcome.

JIM CUMBEE is President of 田纳西河谷集团, Inc. a retainer-based business brokerage and transition mediation 公司位于田纳西州富兰克林. Cumbee is an attorney and has an MBA from Harvard Business School. 吉姆是这本书的作者 韦德体育app官网 Run, A Pro’s Guide to Selling a Business. .  He has a wide range of corporate 和企业家ial experiences that make him one of the most sought-after business transition advisors in the state of Tennessee. 上面的故事是真的, but the names and fact patterns above have been changed to preserve the parties’ identities.

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吉姆Cumbee established 田纳西河谷集团 to help business owners fulfill their dreams for life after business ownership. It’s a mission that his 30+ year career history had prepared him well for—in addition to being an attorney, 转换中介和业务代理, 吉姆是一个买家, 卖方, 和企业家. His broad range of experience gives him unique insight into how business buyers and 卖方s can achieve their goals.

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