Monday, November 30, 2015

[VIEWER QUESTION] How do you know if the asking price on a small business is reasonable?

This week's question is a frequent one. How do we know if an asking price is reasonable?


Hey everyone it's David Barnett from the blog site. This week our question of the week comes from Phil who asked how can I determine if the asking price of a business is reasonable or not. And it's a very difficult question for me to answer because there are so many different ways that I can say ‘it depends.’ Or there are certain circumstances that we have to look at. But let me try to address it with some simple sort of guidelines that can help you determine if the asking price is anywhere within some sort of ball park or not. 

The first thing you have to determine is what are they selling. Because if you are dealing with an unsophisticated seller or someone who is using an intermediary that doesn't know what they are doing, you could end up looking at something for sale which is not purely a business. This would be what we call a recasting exercise. So for example, is it a business but it also includes real estate. Operating businesses and real estate are two very different types of assets. So somebody could have a business with a free cash flow in your pocket of a $100,000 a year, and they might be asking a million dollars for that business. And on the surface that would seem very unreasonable but if you look under the hood and realize that there is a seven hundred and fifty thousand dollars piece of real estate included in that package, then of course that changes everything. And it could in fact be a reasonable asking price. But you then need to try to determine what's the building’s worth and what's the business is now worth based on the business standing alone.

So you have to do so recasting or normalization and look at that business outside of the real estate with all of the direct cost that it would normally bear if it was operating as a tenant. In general what you want to look for is, I'm I going to be reasonably compensated for the risk that I'm taking in getting into this business. So there are two different measures of cash flow that are often looked at when people are evaluating businesses. And one of them is EBITDA, the earnings before interest taxes depreciation and amortization. In the world of professional business appraisal practice, the EBITDA figure or multiplier is only used when we are talking about businesses within EBITDA of half a million or more. But you find that a lot of the times people will use that type of measure for a much smaller business. And what's interesting about the EBITDA figure is that, it's the cash flow after the professional full-time manager has been paid.

So you need to make sure that, that cash flow figure actually includes a salary for a manager and that the manager is being paid a reasonable market rate. So for example if the owner is paying himself $40,000 but a competent manager in that business should earn 70, then you are going to have to adjust that EBITDA figure. And when you look EBITDAs as a general across the board rule of thumb across all industries which means this is a dangerous thing to look at in a specific instance. But you're generally are going to be between maybe 3 up to 5 times that EBITDA figure, is going to be somewhere in that realm of reasonable.

The other way to look at small businesses is what we call sellers discretionary earnings, which is the EBITDA figure with the owners salary added back. So if the EBITDA was $200,000 and a fair market wage of an owner manager is 70,000, then the sellers discretionary earning will be 270,000. This is the figure that is more often used in evaluating smaller businesses. Because small business buyers tend to look at a business acquisition as a mixture between an investment and buying themselves a job. So that cash flow that goes into their pocket, they look at the whole thing as the return on both their invested capital and their labour together. So when we start looking at sellers discretionary earnings, that multiplier could range anywhere from as low as one times to as high as 3 times, maybe a tad bit more with most industries being around the 2, 2.3 area. But again these are general rules of thumb. If you have a seller's discretionary earnings figure of a hundred grand, and somebody is asking for 500,000 for the business, what it simply says is that a combination of your labour and capital; you are going to take five years to get that back.

And the problem with small businesses is that it's very difficult to say with any degree of certainty what the conditions of the business are going to be in five years; the market, the environment, the economy etc. And so that's why when you are looking at investing your money and your labour, most business buyers want to make sure that they can recoup that investment entirely back to themselves within about two years for example. Now that doesn't mean they are going to pay off the business in two years but it means that they need to get that value back out within that two year period. So I hope that gives you some ideas. It can be really dangerous to apply these rules of thumb in a specific instance. So for example if you went you and you valued a restaurant at the 2.2 times discretionary cash flow, you would actually end up over paying for the restaurant. It's a very competitive industry and people in that industry end up paying far less because of the risks involved.

So I hope that gives you an answer. If you want to really get in and understand how to do this, then I suggest you take my course which is available at where we actually work through a step by step example with a sample company. We look at the initial financials, we do normalization. We then do an evaluation of the business and I explain why the multipliers that are put in place in that example are used and how they make sense. So thanks and we'll see you next time.

Hey you made it to the end of the video. That’s great. Don’t forget to visit and sign up for my e-mail list. Thanks and we’ll see you next time.

The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback.  Sign up for my mailing list and don't miss a thing! [CLICK NOW]

Friday, November 27, 2015

The Christmas gift for the #SmallBiz and #Investing Fan in your life

An author-signed paperback copy of Invest Local.

Order today to receive in the mail in time for Christmas.

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Wednesday, November 25, 2015

Shout out to Sasha Kravetz who created my new profile pic.

You may have noticed that I've been using a new profile picture on my different sites and social media profiles.  I wanted to send a shout-out to Sasha Kravetz who spends time with clients in Moncton and Montreal for his great work.

Learn more about Sasha here: 

Monday, November 23, 2015

[VIEWER QUESTION] 3 ways to evaluate the price of a small business that is for sale.

This week I answer a question about the different ways we can evaluate the price of a small business that is for sale.

For an in-depth demonstration of how to do this yourself, sign up for my online course at


Hey there it's David Barnett once again with another viewer question. This time it's from Michel, and Michel asked, what are the different ways to evaluate a business that's for sale? And basically the methods that we use when evaluating a business fall into one of three camps. Let's take a look. So our methods of small business fall into three different camps or schools of thought. The first one being market comparison. So if you wanted to have a business evaluated as a buyer or a seller, and you went to someone who had the proper training skills and access to information on how to evaluate a small business. One of the things they would actually do is actually compare the subject company that you are looking at with other businesses in the same industry that have already sold. And what they want to do is compare similar businesses and similar size businesses. And what they are going to find is what other people have paid as a percentage of sales and as a factor of discretionary cash flow So the database might come back and tell me that a given company might sell for; other people paid about 32% of sales for example, or they paid 2.4 times discretionary cash flow. So we are actually comparing the subject company with other businesses that have sold. And what we are doing is that we are actually getting the feedback of all those previous buyers and more listening to their opinion of what they thought the risks were in getting into this industry. So that by far to me is one of the best way to evaluate a business.

The second group is the capitalization or I put mathematical methodologies. Because basically what we are doing in this case is we are trying to determine what rate of return is going to make us happy. What do we want to see happen at the end of the day if we were to own this business? Are we going to require a 20% return on our investment? Are we going to require a 40% return on our equity that we put into the deal? So there are many different ways that you can look at it from a mathematical point of view. And if we are looking for a certain percentage, these are often called capitalization rates. Cap rates are used quite often for example in the real estate evaluation area. The other way to look at it is multipliers which is the same thing, just from a different point of view. So you might hear people say that certain businesses sell for three times earnings for example. That would be an example of a mathematical or capitalization type method of business evaluation. 

The third category will be simply looking at the assets involved. So I call it asset evaluation or cost to create, where you are going to look at, what are the tools, equipment, inventories, receivables, operating capital etc. required to make this business function. If I were going to take a subject company and recreate the same thing next door, what would it cost me? Now part of this can be done from the balance sheet of the company, but to really do it accurately you would actually have to evaluate and find out what the market value was of certain assets within the business: hiring appraisers, evaluators, this type of thing. So the one thing though that this group of methodologies doesn't include or leaves out is goodwill. So if we have a profitable business that makes money all the time, then it's conceivable that there would be a goodwill component to any value for that business. And this would be left out using those methods. Now when I evaluate businesses, I actually try and employ these three groups and methods. There are 13 specific methodologies that I use when I'm doing an evaluation. And I don't employ all of them in every case. But I try to have at least one from each of these three groups.

It can be informative for example when you are setting up your deal structure that you might offer an amount of money that included goodwill. So your offer might be based on a market evaluation or a capitalization method, but perhaps you don't want your down payment amount to be greater than the asset or cost to create. So that the amount that you are asking the vendor to finance, the vendor take back is in fact largely the goodwill component, which makes it safer for you and makes financing more easy. So I hope that answers your question Michel. If you want to see in detail how these things get applied, then what I suggest is that you take my business buyer course, which is available at where we actually take an example company through the entire process. We look at the financials, we do a normalization, we then do an evaluation and I show you the different methodologies and they get applied. Thanks and we'll talk to you soon. Have a great day. 

The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback.  Sign up for my mailing list and don't miss a thing! [CLICK NOW]

Saturday, November 21, 2015

Friday, November 20, 2015

Wednesday, November 18, 2015

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Monday, November 16, 2015

Delegating tasks vs. delegating responsibility. What every business owner needs to learn before they can grow.

I had a great consulting call the other day with a business owner who was thinking of selling one of his businesses. He simply didn't have enough time for it.
Why was this guy able to have 5 or 6 managers reporting to him when he was an executive in a big company but now only one manager was driving him crazy?
Learn about the difference between delegating tasks vs. responsibilities. Want to speak to me?


Hey there I want to make a little video because I had a really cool call with someone on the phone the other day. A quick consult call and it ended up being an hour. It was a business person who owns a couple of different businesses and two of the businesses that he owns are the same. But they are in two different provinces, so they are far away from each other. And basically every year he sits down and does some planning as to what he wants to do for the coming year. And he looks at all the options for all these businesses, and he wanted to talk to me about the idea of selling his business that is in the neighbouring province. And I basically I asked him all sorts of questions. But it came down to two questions about this potential selling of this business, and I basically asked him, why do you want to sell? And he had opportunities to use money, that was number one, and number 2 it took a lot of his management bandwidth and waste a lot of his time. 

So we went through briefly the whole idea of selling it and sort of did a back of the napkin calculation of what the business might be worth, what the terms of sale likely would be, and how much money he would end up with if he tries to sell it. And is that enough to accomplish his other goals or opportunities etc. But when I started asking him about the personal reasons for getting rid of this other business, what kind of time or bandwidth does  this would take up for you? He started to explain to me that sometimes every day there is something he has to deal with in that other business. Now I had spoken with this entrepreneur before, and I knew a little bit about his history, and I knew that he was a senior level vice president of a large corporation. And would have had many managers reporting to him when he was back in the corporate world. So I asked him, I said, how many managers did you supervise when you were in your corporate job? And he said, quite a few, sometimes five or six.

And I said were you stressed out and had no time then, and why were you able to manage five or six managers in your executive role, and you are having difficulty and stressed out by managing one manager now. And it's a great question, in fact he wasn't able to answer it. So I had to prod him a little bit more, and basically it comes down to something that his fundamental in the book E-Myth by Michael Gerber. And it's the difference between entrepreneurs and technicians. And even people who know how to properly manage and be entrepreneurs sometimes need a little bit of coaching and a little wake up call to get themselves back on track. When he was a corporate level executive and had many managers beneath him, he would manage by numbers. So a person reporting to him had a certain role and they had targets they had to meet, and he let them work at that. And he probably review the numbers every week or every month, and when there were problems he would outline expectations and give them support or help if they needed it.

But he let them do their job. So in big corporate enterprises, what you see is a delegation of responsibilities. In small businesses what you technically see is not a delegation of responsibility but a delegation of tasks. So the owner is so busy he can't do everything but he still wants to make all the decisions. So I pointed this out to the guy, I said you are interfering in the work that the manager has to do. And they are not making decisions, they are not doing everything they could do because you are always getting involved. So why are you managing in this fashion today where before when you worked for the big company, you didn't do that. Again, why, what's the difference? And what I think, and this is from my own experience and observing so many small business people over the course of time, is the difference is, it's your money. When you are the executive at a big corporation some person that reports to you, they might make a mistake that costs $10,000 and while it may affect you and it may affect your bonus or something by having an impact on the numbers for the year. It's not your $10,000 they lost, it the company's $10,000.

And I think it's that level of detachment in the big corporate world that allows these big corporations to actually function because people will actually delegate responsibilities. And not be so concerned that any little mistake is going to cost the individual within the corporation personally. Now in a privately owned small business it’s totally different because if he let that manager do their job, and made a decision that lost $10,000 they just lost 10,000 of his dollars. And that's the difficulty, so I think it was sort of a breakthrough with this guy and he realized that what a lot of people do is that, there is never a good financial reason to sell a profitable business. You can never get for a good profitable business what it is worth to you. That's why people who sell small businesses always do so because they have a pressing personal reason. The numbers never quite make any sense, you always at the end of the day go, Jeez well if I just kept it for another 2 or 3 years I would have the same money anyway, right. So that's why you have to have a personal motivation to actually pull the trigger and do a sale. So he is going to work on himself over the course of the next year and try to actually delegate responsibilities to his manager in the other province. And try to manage the way he used to back when he was an executive. I thought that, that was a really great call, if you would like to speak to me about some of your business deals or talk through a decision or pick my brain and do a quick consultation. I'm available all the time. The easiest way to get to me is at Any way until next time talk to you later. Bye

The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback.  Sign up for my mailing list and don't miss a thing! [CLICK NOW]

Monday, November 9, 2015

[VIEWER QUESTION] How can I trust that my information will be safe when buying or selling a small business?

People are always worried about their personal information, especially when it comes to the details of a private business.  Would it surprise you to know that buyers and sellers both have compelling reasons to safeguard the details of a small business for sale? Watch:


Hey there this is Dave again from the blog site and I got a question from someone who is talking about their personal private information when it comes to signing the NDA non-disclosure agreement, when being a buyer or seller of a business. Basically asking, can I trust that the other party is not going to divulge my information? Well let’s look at it from both sides of the transaction. So, from the sellers point of view they want to sell a business. And their personal private information might include the financial statement of the business. And of course they are worried if they share that information with prospective buyers, that these buyers will go and share that information with other people. So here is the one thing that you have to understand. The buyer is motivated to buy a business for some reasons. Either they hate their job, they don't have a job, they want to expand their existing business, what have you. If they break confidentiality and tell people that your business is for sale, they might ruin your business which will destroy the very thing that they are trying to buy to achieve their goals.

Now as long as they understand that, so when I was a broker I use to tell that to buyers, I use to say, look you have to protect confidentiality of this information. And even the fact that the business is for sale, because this is the solution to you problem. And if you break confidentiality, you are going to ruin the solution to your problem. And that usually took care of things. I only ever have one buyer that had callous disregard for confidentiality, and I fired him, he was gone. Now from the other point of view, if you are a buyer and you are disclosing personal information to sellers and brokers etc. Then it becomes a question of what kind of professionals are you dealing with, and you know one of the greatest tools that has come along in the last few years that can help judge how professional someone is, is a website called LinkedIn. On LinkedIn, you can look someone up and you can see how many contacts they have, and you can see how many people endorse them; give them a little thumbs up or a plus sign. 

for different skills. For example if you go and look me up on LinkedIn; David Barnett, you are going to realize that over 99 people have endorsed me for entrepreneurship, close to that number for small business etc. There is a whole list of attributes, those people have actually looked at me, they know me, they are connected to me and they say, yep, David is an expert in that field. So when someone looks at my LinkedIn profile and they see hundreds of endorsements, it's a really great way to know that you are dealing with a professional person. On the other hand if you go and look in someone's profile and they are like four people that endorse them, then you have to wonder, how well is this person known in the community, how long have they been in business, why don't they have this web of connections with other movers and shakers in the industry. It's one of the ways that you help verify if you are dealing with someone who is out there and who is what they say they are.

 If you are a buyer and you go to a broker who says he is connected to all these different people and all these different businesses, then there should be evidence of this online. Any way that's my insights into how you can know whether you trust someone with your private information. If you are interested in learning more how to buy a business, you should be checking out my online business buyer course which is at, See you next time thanks.

The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback.  Sign up for my mailing list and don't miss a thing! [CLICK NOW]

Friday, November 6, 2015

7.55X Return on Investment for this student! Why you should take my local investing course

I had a great conversation with a student who took my local investing course.  They're about to do a deal which will pay them back many times over just from the lending fee involved in the deal.

You can take this course.  Sign up at

The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback.  Sign up for my mailing list and don't miss a thing! [CLICK NOW]

Wednesday, November 4, 2015

Another happy customer.. Thanks Byron!

Byron has left a new comment on your post "I need your input: do you want to learn how to do ...":

I am so glad I found your blog! I love learning new financial concepts and strategies related to business ownership and personal finances. 

Monday, November 2, 2015

[VIEWER QUESTION] What are the best cash flowing businesses to buy?

What kinds of businesses can produce the most cashflow? Are there certain types? Let's see.


Hi there everyone it is David Barnett and this week I am answering a question from Bruce and Bruce asks: What are the best businesses to buy with respect to cash flow? Now as far as my understanding of what cash flow means is I want a business where a high percentage of the sales ends up down in my pocket. So, there is really three categories of businesses as far as I am concerned that can create a high degree of cash flow. 

The first sector is what we will call regulated businesses; now when you first think about regulated businesses you might think about larger businesses like: power utilities or natural gas pipelines for instance. Anywhere, where rules and regulations prevent new competitors from entering the market. This can be good for protecting the profitability of the players that are already there. Now, in some jurisdictions there are some regulated industries that would be considered small businesses that you could get into. Where I live for instance it is highly regulated who can be in the bottle return business, so there is only a certain number of a licences out there. And what  that does is it limits the competition for each region of the providence meaning that the operator who has the licence can probably get a little bit more profit out of that business than he would be able to if there were many competing businesses all around him, so that is the regulated industries.

The second category would be your service businesses where you don't have a high cost of goods sold. So this would be in contrast to a business where you sell goods; let’s say I sell oil I take in a dollar of sales I might have to take $0.90 of that dollar and turn around and use it to buy my product.  So, that is a commodity business, I wouldn't consider that a high cash flowing business. If you compare that to a service like house cleaning, you may have a labour component but you can adjust your labour input to meet demand, to meet the sales. So if you don't have work and you don't have homes to clean you then cut back on the hours that you employ your employees so that you can have more of your sales fall through to the bottom line. And that is why there is such a huge service sector in the industry and I even consider things like restaurants to be part of the service sector. Because, they tend to have a low cost of goods sold. if you can meet that breakeven point every month. Then a high percentage of your marginal sales over break even ends up down in the net income one.

The third category of businesses that would be a high cash flowing sort of business to get into would be a business that you work once but get paid many times. So, think about for example the books that I write; each one of them took days of my time and effort to write and then edit and then prepare them. But now that they are done I can sell them over and over again and every time I sell them I earn money but I don't have to do any work. That is why we see such crazy sky high valuations in the world of IT or online businesses. There is a term in the online world called "SaaS" or software as a service. Where they take what might have been years ago a piece of software that you would buy but instead of selling you the software they put it online and they let you use it for a monthly fee. There are all kinds of things on there now that you can probably find that can be offered as software as a service like accounting packages and things like this. Even google apps like google docs if you are business; you can sign up I think, I believe it is only $5 per month per user.

But if you consider the fact that the work gets done once and is now out there on the internet and now serve thousands or tens of thousands or millions of people with the same platform then obviously all these customers that come in are creating more work for the people that built the system. Now that it has been built it is up there it is running, so those are your three categories; regulated businesses, service business and call it technology or intellectual property businesses where you create or do something once and are able to sell it many times over. 

Anyway Bruce I hope that was helpful for you and as always if you enjoy my video please like or share it that is how I grow my viewership and if you want to make sure you don't miss out on any of my latest offers or new videos be sure to subscribe to my email list.
The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback.  Sign up for my mailing list and don't miss a thing! [CLICK NOW]