1. Jane Winfield would like to buy Ted Garners gourmet coffee shop. She has conducted a detailed financial analysis of Teds firm and has determined the following:

• Current owner salary = $35,000
• Market rate for a business manager = $65,000
• Multiple = 5
• Book value of the inventory: $10,000
• Number of shares of common stock: 5,000
• Price/earnings ratio: 6
• Gross Margin = $150,000
• Estimated EBITDA = $78,000

Based on this information, how much should Jane valuate the business according to each of the following methods?

1. business valuation using multiple of cash flow and EBITDA Salary Adjustment

$48,000 = 78000 + 35000 65000

2. P/E

3. Multiple of Gross Margin (using a multiple no greater than 2

4. Based on your findings, recommend the valuation method she should use.

1. Finally, given all of your calculations, estimate what the final price will be. Give reasons for this estimate. Georgia Isaacson and her son Rubin have been thinking about buying a business. After talking to seven entrepreneurs, all of whom have expressed an interest in selling their operations, the Isaacsons have decided to make an offer for a retail clothing store. The store is very well located, and its earnings over the past five years have been excellent. The current owner has told the Isaacsons he will sell for $500,000. The owner arrived at this value by using his EBITDA at a multiple of seven.

2. The Isaacsons are not sure the retail store is worth $500,000, but they do understand the method the owner used for arriving at this figure. Georgia feels that since the owner has been in business for only seven years, it is unrealistic to use a multiple of seven. A five-year estimate would be more realistic, in her opinion. Rubin feels that they should be more focused on the value of the inventory they are buying. He is thinking that they should adjust the price for obsolete inventory.

In addition to these concerns, the Isaacsons feel they would like to make an evaluation of the business using other methods. In particular, they would like to see what the value of the company would be when the asset value method is employed. They also would like to look at the gross margin value method.

We know what the owner feels his business is worth, Georgia noted to her son. However, we have to decide for ourselves what we think the operation is worth. From there, we can negotiate a final price. For the moment, I think we have to look at this valuation process from a number of different angles.

1. If the owner reduces the earnings multiple from seven to five, what effect will this have on the final valuation?
2. How do the asset value and gross margin methods work? Why would the Isaacsons want to examine these methods?
3. If the Isaacsons decide to use the EBITDA multiple of five and discount the price by $25,000 for obsolete inventory and $10,000 for expected equipment improvements, what might their offering price be? How can the seller and the buyer reach an agreement? What do you think the final price will be?