Multiples are developed from market research, using data from sales of comparable businesses. In a business valuation, adjusted net profit equals the profit for the business plus the owner's salary. Since many small businesses have little profit after the owner's salary has been paid, it makes sense to add it in as an adjustment to show the true earnings potential of the business. A cap rate or capitalization rate is another form of multiplier. The cap rate is determined by the market place and is used when net earnings-based valuation approaches, like the SDCF, are used.
Some businesses sell for multiples outside the typical range.
These businesses are priced to reflect exceptional attributes or situations that justify a dramatically different price. For example, a business that has an outstanding track record, increasing sales, top-notch management and staff, and an alliance with a leading supplier of the year's hottest product will obviously sell for more than a business with none of these attributes. Trade associations, other business owners, business brokers, and accountants collect information about actual sales. Choosing the Valuation Approach that's Best for Your Business Placing a value on your business starts by understanding the different business valuation approaches. Some approaches work well for many types of small businesses, others are designed to fit specific situations, such as the Asset Sale valuation approach.