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TRUMP UNIVERSITY WEALTH BUILDING 101

Step 4: Value the Business

Now the fun begins. What a seller thinks his business is worth usually has
nothing to do with the value. Valuation is an art, not a science. Forget the
asking price. A sound valuation includes doing the following:

• Review past fi nancials.
• Achieve an adequate return on your investment.
• Determine how the business will transition to a new owner.
• Understand any inherent problems in the business (e.g., too few cus-
tomers generate too much business).
• And finally, estimate realistic growth potential.

There are many valuation methods, but with most small business acquisi-
tions, the multiple method is used to determine the valuation company’s

financials. Use the “Total Owner Benefits,” which assumes everything remains

status quo after you buy: how much the business will generate to pay your sal-
ary, service the debt, and build the business.
Here’s the formula:

Net income Owner salary Owner perks Interest

Depreciation Capital expenditures Total owner benefi ts

Look at two to three years of these figures. Here is an example:

Net income (off the tax return): $80,000
Owner salary: $70,000
1
Owner perks: $50,000
Depreciation: $20,000
Interest: $5,000
TOTAL: $225,000
2
Less Capital expenditure allowance: ($25,000)
TOTAL : $200,000
1 Owner perks can include medical insurance, a spouse’s car, personal vacations, or meals
charged to the business.
2 On average, the company spends $25,000 annually to replace old equipment, so you must de-
duct this.

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