How does the value of items on the balance sheet - inventory, equipment, cash, accounts etc. - affect the valuation if you are using a multiple of earnings?
Some of the items on the balance sheet such as machinery, vehicles and equipment are required in order for the business to produce its earnings. So if you are using the multiple of earnings method, the value of those assets is already reflected in the earnings figure you are multiplying.
If you earned $100,000 last year and using a multiple of 2 then you would be asking $200,000 for your business.
Your machinery, equipment, vehicles as well as you good location and experienced employees and repeat customers where all needed in order to generate those earnings so you can't use a multiple of earnings to start and then add on a line item addition for all the assets that were needed to achieve those earnings.
That would be double dipping and no one is going to pay twice for your assets.
The cash and receivables are usually kept by the owner after the sale so they wouldn't affect the price.
In most cases, the inventory is valued at its replacement cost. Not at what the seller paid for it or what it can be retailed for, but what it would cost the new owner to go out and replace the inventory.
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