Business Acquisition Protocol

and Business Valuation Matrix

by: Theodore P. Burbank, FIBBA

Transaction structure and financial requirements will vary depending upon the size and type company involved.  Businesses can be divided into four classes.  Definition of Earnings, usual Price/Earnings ratios and Terms of Sale vary by classification.

  • Wall Street
    Usually Public or very large private companies.
      Earnings:                         Measured in Millions
      Earnings Definition:          After Tax Earnings
      Price/Earnings Ratio:       10x to OMG*
      Usual Terms:                   Cash or equivalents
      * Oh my GOD!

  • Middle Market
    Generally Private companies with well defined Corporate structure.
      Earnings:                       $500K to Low Millions
      Earnings Definition:        EBIT , EBIT-D, EBIT-DA to After Tax Earnings
      Price/Earnings Ratio:      3x to 15x
      Usual Terms:
           Down Payment:        Equity of 1 to 2x Earnings to all Cash
           Plus:                         Bank note(s) and owner financing   

    Companies that represent a "Strategic Fit" usually will be valued and sold using "Wall Street" protocol. When a strategic reason for purchase is lacking, "Upper Main Street" methods are generally employed.              

  • Upper Main Street
    Private companies with Corporate structure developing.  Owner has delegated many functions to others.  
    Earnings:                          Usually under $500K
    Earnings Definition:           Adjusted EBIT or EBIT-DA, Sometimes EBIT and EBIT-D are used                       
    Price/Earnings Ratio:       3x to 7x
    Usual Terms:
           Down Payment:         Equity of 1 to 2x Earnings
           Plus:                          Owner financing - limited bank involvement

  • Main Street
    Commonly referred to as "Mom and Pop" businesses.  Owner wears "all the hats."  
    Earnings:                         Usually under $150K
    Earnings Definition:          Discretionary Earnings            
    Price/Earnings Ratio:       1x to 4x
    Usual Terms:
           Down Payment:        80% to 120% of Earnings 
           Plus:                         Owner financing - Bank financing is rare

  • Definition of Terms:
    EBIT  =  Earnings Before Interest and Taxes
    EBITD = Above plus Depreciation
    EBIT-DA = Above plus non-recurring and discretionary expenses
    Discretionary Earnings = EBIT-DA plus Owner's Compensation

Note: Down payments or equity investments may exceed the levels indicated when inventories and other current asset values are high.

This article has been condensed from "The Complete Guide to Business Valuation when Buying or Selling a Private Company" 

Mr. Burbank is President of Lighthouse Financial, LLC and Parker-Nelson Publishing.  Since 1979 he and his associates have participated in more than 2,000 business transfers.  He is the author of seven books and six software programs relating to Finding, Investigating, Valuing, Financing, Buying, and Selling a Private business. A pioneer in the practice of business sales and valuation, Ted is recognized nationally as an authority on the subjects.    

He developed a “Business Selling System” which, over fifteen years, has proven to increase the probability of a successful business sale by as much as 400% over the results produced by business owners or typical business brokers.* His latest work is his book “Wealth Building Exit Strategies for Owners of Private Companies.”

He has recently established a nationwide network of brokers and intermediaries who follow his Business Selling System principles as the “Business and Franchise Re-Sale Network.” 

Ted has conducted seminars on business sale and succession issues for trade and professional organizations in this country, Canada and abroad. Ted is available for private assignments and consultation.   

He may be reached by telephone: 508 794-1200 or by email: