Our Business Broker Services Frequently Asked Questions (FAQ's) page is to answer your most common questions about buying and selling your business.


Business Broker Services, Inc. FAQ page.

This question was received from Tom in Canton, MA ...

"I looked at a Marina this week. I felt the asking price was too high. The broker told me the selling price was established by the 9% cap rate! What did he mean?"

It is actually a complex question. There are many difficulties in answering this question in any one particular way specifically regarding Marinas. The Marina could be compared to a sale of commercial property particularly ocean front property, which is scarce. While the business selling price can usually be evaluated from the profit and loss statements and the tax returns. The value of the accompanying real estate can make it difficult to calculate and drive the price out of the existing marketplace. The agent selling the deal might have to wait for a strategic buyer. On the surface, the calculation of cap rates seems to be a relatively simple process. However, it comes with difficulty and uncertainty, and requires a lot of digging for information, questioning, and being alert to special circumstances, which may distort the answers.

In the business broker industry we have the ability to draw from our organizational databases to find comps for the business portion of the sale. The comps can come from Pratts Stats, The Institute of Business Appraisers, Bizbuysell, our in house comps, etc.

However, the value of the real estate can overpower and have the ruling effect for the actual market value. This can be compared to Bed and Breakfasts, Restaurants for sale with Real Estate, etc.

In summary, the financial performance of the business is the indicator used for the business evaluation to arrive at the market value of the business. The buyer must then add the value of the real estate to see if he/she is a qualified buyer to purchase this type of business. The buyer will need a minimum of 20 to 25% down to qualify for lender financing. If the value of the real estate out performs the value of the business the buyer will need a greater percent share for down payment.

The Cap Rate is calculated as follows:

Cap Rate = (Net Operating Income / Market Value) x 100
Cap Rate = (NOI / MV) x 100

Example:

Net Operating Income (NOI): $239,430
Market Value (MV): $3,420,000
Cap Rate = (239,430 / $3,420,000) x 100
Cap Rate = 7%

The Cap Rate of 7% represents the annual return before mortgage payments and income taxes on the total investment of $3,420,000.