Asset purchase price of X. His EBITDA number is very low and I can’t understand why his Asset sale value is coming out the way it is.

This firm has a three year average discretionary earnings of around $425K per annum, which corresponds to a multiple of around 4 times. Based on their New York City proximity and three generations of service, this is a reasonable multiple to seek when selling a company like this.

Our valuation algorithm is only marginally affected by EBITDA and instead relies on an "adjusted EBITDA, also known as discretionary earnings" which includes the compensation paid to a single owner-operator. For smaller, owner-operated businesses, reliance on straight EBITDA is problematic in that a very high owner compensation can bring EBITDA down to zero or less - while the owner is being paid a million dollars (for example).

Besides the optimal accuracy of discretionary earnings when evaluating owner-operated companies, the wealth of comparable transaction data which is available to Bizequity is based largely on the measure of discretionary earnings.

The asset sale value was found to be around 4 times the discretionary earnings. The equity value is considerably lower due to the high level of current liabilities (debt).