Anyone know any good literature regarding valuating small businesses? Like liquor stores, gas stations, delis, etc. I've been doing quite a bit of window shopping on bizbuysell.com and it looks like a lot of small businesses can be acquired at between 2-4 times earnings. I'm interested in learning more about valuating small businesses, but most of the literature I've found isn't exactly geared towards people with a finance background.
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why can't you just apply the fundamentals of valuation for a large company and scale it down? Instead of valuing all of JCP, just try looking at an individual store.
That would be an apples to oranges comparison. Reasons being:
1) Small businesses go for a steep discount relative to publicly traded companies because when you are buying a small business, you are also buying yourself a full-time job.
2) The books of small businesses (especially mostly cash businesses) are notoriously inaccurate. You assume a mostly cash business owner isn't going to be entirely honest with his taxes, so you need to be able to figure out how much more they actually made than they reported on their taxes. Also, did the seller start reporting more income in previous years, in anticipation of selling the business? These are all things that need to be figured out and the seller is the last person you want to rely on for answers. For example, when valuating a laundromat, I would consider last year's water bill a better indicator of of earnings than last year's income statement.
Discount it by these factors? There's not gonna be any method that takes these into account explicitly
What's wrong with just applying your logic to different business models? Extrapolating revenues from variable costs. You'll need to estimate a per unit cost and should be able to land at revenues. Then work down to FCF.
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