Business and taxes
There are a number of ways to value a business:The conventional method taught in business schools, is revenue and sales. This may be true for a conventional public listed company, but is not valid for smaller businesses.
The most common method used by business brokers is OCF. Owners Cash Flow. This is the amount of money that the owner of the Small business enjoys from the business. This is the most accurate way for a potential buyer to understand the amount of money that the business generates. The Broker then uses a formula and compares the business to other ones in the general market to help find value.
Many small business do not show a large net profit. Yet they have been in business for many years. (You can ask yourself: How do they do that?)
Simple. For tax reasons. The less profit you show, the less taxes you pay. So how does the owner make a living? The answer is how does he or she take the money out from the business?