Pricing Small Businesses: Using Rules of Thumb and Sellers Discretionary Earnings

1. Rules of Thumb & Sellers
Discretionary Earnings
© 2010 Allen & Young Business Brokerage LLC 2500 N Tucson Blvd Ste 109 Tucson AZ 85716 T 520-327-4454 F 520-327-1271 info@allenandyoung.com www.allenandyoung.com

2. What are Rules of Thumb?
•Many of you have heard of rules of thumb for selling a
business. But, how accurate are they? They are NOT!
•Most rules of thumb are NOT market driven. Frequently,
they are based on someoneʼs opinion of a past sales price or
even an asking price.
•They are what they are, no more no less, a simple back of
the envelope calculation that is generally misleading. They
should never, and I repeat NEVER, take the place of a
thorough analysis of the business in question.
© 2010 Allen & Young Business Brokerage LLC 2500 N Tucson Blvd Ste 109 Tucson AZ 85716 T 520-327-4454 F 520-327-1271 info@allenandyoung.com www.allenandyoung.com

3. What is a more accurate way of pricing a
small business for sale?
Multiple of Earnings.
•For small business, this multiple is used against
what is called “Discretionary Earnings.”
•Discretionary Earnings is usually based on a
multiple between (0-4) which is then multiplied
against the earnings of the business.
© 2010 Allen & Young Business Brokerage LLC 2500 N Tucson Blvd Ste 109 Tucson AZ 85716 T 520-327-4454 F 520-327-1271 info@allenandyoung.com www.allenandyoung.com

4. So what are Discretionary Earnings?
•Discretionary Earnings are the net earnings of a business
enterprise before taxes, adjusted for the following items:
1. nonrecurring income and expenses
2. non-operating income & expenses (the ownerʼs perks)
3. depreciation and amortization
4. interest income or expense
5. total compensation for one owner / operator
© 2010 Allen & Young Business Brokerage LLC 2500 N Tucson Blvd Ste 109 Tucson AZ 85716 T 520-327-4454 F 520-327-1271 info@allenandyoung.com www.allenandyoung.com

5. • We hope this provides you with a better understanding
of the process of pricing a small business for sale.
• Regardless of where you live, we would be happy to
discuss the process of buying and selling a business with
you.
• If you have any questions, or to see a full list of
resources, visit us at www.allenandyoung.com.
• You can also call us at 520-327-4454
© 2010 Allen & Young Business Brokerage LLC 2500 N Tucson Blvd Ste 109 Tucson AZ 85716 T 520-327-4454 F 520-327-1271 info@allenandyoung.com www.allenandyoung.com