A Benchmark Analysis is a summary, non-certified report. The engagement letter identifies the business owners agreed upon specific approaches and methods used and the extent of procedures performed. It is used to set and Asking Price and a Selling Price of a business
The Benchmark Analysis uses the Institute of Business Appraisers database of 37,000 (+) sales transactions organized into 700 (+) standard industrial classification codes in a modified Direct Market Data Method. The Market Approach uses the sales of similar companies using Price to Sales and Price to Seller’s Discretionary Earnings ratios to benchmark the Selling Price for the business owner’s business. The report includes a company ratio analysis that compares the company against itself, and its peer group as identified in Risk Management Association’s average company within a specific dollar sales range.
A proof of purchase justification analysis uses a Small Business Administration Loan Guarantee model to verify the estimated value. The Seller’s Discretionary Earnings (EBITDA plus one owner’s salary and perquisite) is used to resource the model. The model must prove the ability to pay an owner’s or manager’s salary at market rates; pay the principal and interest for the acquisition debt; account for changes in working capital and capital expenditures; and provide a return on investment commensurate with the risk associated with a small business’ down payment and cash injection.