When I was about 10, my family bought a sporting goods store in a small town in Idaho. Yep, the same one where “Jesse Pinkman” lived for a time.

We sold fishing tackle, guns, ammo, snacks, ice and bait. I remember the ice and bait because it was my job to pack ice and put worms into styrofoam containers with “worm fluff”.

I’m not sure what “worm fluff” is but the worms seemed to like it.

It was exciting at first to have a place with our family name while getting established in our new hometown.

I didn’t know what “margins” were back then. Just that money was tight and my folks worked so hard to keep the store afloat.

Years later, we had to sell it. It just wasn’t making money.

I always wondered why.

Was it on the wrong side of the highway (southbound and the waterski reservoir to the north)?

Down economy?

It certainly wasn’t from lack of trying.

Now I know about “valuation” of a business from listening to Dave Ramsey. (I know, at this point I should probably be called “Daveygirl.com”).

If I was interested in buying a business today, how would I know how much a business is worth?

It’s actually easier than I thought:

It’s called “valuation”.

Valuation:
Look at the
NET profit times 4-5

Oh God. Here she goes with math.
AGAIN.

I would rather eat worm fluff.

Net=
Gross profit minus (costs+wages)

I can imagine the seller saying
“This is a money-maker. Our topline (gross profit) was $50,000 last year!”

That is gibberish.

Worm fluff.

“Topline” means GROSS profit.

It could be that the llama farm you’re dying to own grossed $50,000 but the costs were $45,000.

A net profit of $5,000 or 10% is very risky for a small business.

You need about 20-25% net or $12,500 to make a decent profit. You’ll need some of this net profit for raises, barn repair, investments etc..

If the llama farm made a good 25% net profit, you the multiply that times 4-5.

12,500*4=$50,000 (low)
12,500*5= $62,500 (high)

$50,000 is a starting offer for the llama business. $62,500 is the MOST you should pay for the llama business.

Or worm fluff.