Florida Real Estate Sales Associate Examination Content OutlineReal Estate Investment and Business BrokerageMedium
A business broker is valuing a small restaurant for sale. The restaurant's annual net income is $120,000. Similar restaurants in the area have recently sold at a multiple of 3.5 times their net income. What is the estimated value of the restaurant using this method?
- A$480,000
- B$525,000
- C$342,857
- D$420,000
Show answer & explanationAnswer & explanation
Correct answer: D. $420,000
The valuation method described is the multiplier method, where the estimated value is found by multiplying the business's net income by the industry-standard multiplier. Value = Net Income * Multiplier. So, $120,000 * 3.5 = $420,000.
Why the other options are wrong
- A. This is incorrect. This might result from using an incorrect multiplier.
- B. This is incorrect. This might result from an addition error or using a different valuation method.
- C. This is incorrect. It might result from dividing net income by the multiplier.
Business Valuation Multiplier Method
A business valuation technique that estimates a business's value by multiplying its earnings (e.g., net income, gross revenue) by an industry-specific factor or multiple.
- Often used for smaller businesses or those with consistent earnings.
- Multipliers are derived from comparable sales data.
- Simpler than discounted cash flow but less precise for unique businesses.
Memory trick: Value a business: income, assets, or comps.