How much is a company worth, if its earning potential is $2-3 million a year (gross)

Question

A friend of mine wants to sell his company. Earning potential is 2-3 million dollars a year (gross). How much do you think the company will be worth?

Answer 1

It's worth at least the value of it's physical assets.  How much more (if anything) depends on how much a willing buyer is willing to spend in order to own that particular business.

Answer 2

I beg to differ with the others who have answered you.

I believe that you will find that when buying and selling businesses the price is based on actual historic earnings -- not the owners equity as calculated by the accountants.

Stop and think about it.  If you could buy one of two businesses and one business has a book value (assets - liabilities) of $1,000,000 and makes $80,000 per year and the other has a book value of $100,000 and makes $80,000 per year which would you rather buy?  

I am pretty sure, that like me, you would go for the second business.

Now as to earnings potential.  I agree that the only place potential counts is if you are planning on going public.  If not forget the potential when valuing the business because you have no way of knowing what percentage of the potential can be realized.

One other comment.  Are you talking about the potential revenue or the potential net earnings?  The only one that would matter (assuming you could find someone looking to buy it and then go public) is the potential net earnings.

Hope this helps

Jerry-the-bookkeeper

Answer 3

A company's value is mostly determined by its physical properties, like its equipment, inventory, and any real estate and rolling inventory it owns. The value is somewhat informed by the company's historical financial performance, but not in a critical way.

Earnings potential doesn't mean much to someone looking to buy unless we're talking about going public.