The asking price is determined using a cash flow and asset methodology. Cash flow is the sum of net income from the business plus any non-cash expenses, non-recurring items and any seller’s personal expenses. The asset methodology takes into account what it could cost to open a similar business in equipment and square feet. A multi-factor multiplier is applied to the cash flow based on the condition of the business and the asset value is added to that result.
For this business, a three-year average cash flow is applied, making the business price more favorable to a buyer. The multiplier applied in this case is 2.2x, a highly desirable price to value ratio.
The SDE value takes into account the time to build up goodwill and customer reputation & base. To build out a similar space with like equipment from scratch, it could cost upwards of $1 million or more for the assets alone.