1. Sales, estimated for 12-month future period.

2. Operating expense, stabilized as outlined in article to eliminate all anomalies. Include cost of goods and operating labor.

3. Administrative expense, to be prepared after close examination of normal expenses required that are not included in Line 2. Do not include owner's salary, depreciation, or interest expenses.

4. Owner's salary. Should be what would be paid for competent hired manager.

5. Replacement fund. This is a "sinking fund" that replaces the book depreciation expense. It is "charged" to earnings so that funds will be available to replace assets as they wear out.

6. "Stabilized" earnings (Line 1 less Lines 2 through 5).

7. Value of assets plus necessary working capital.

A. Land

B. Buildings

Inventory:

Raw

Work in process

Finished

Resale inventory

C. Total Inventory

D. Equipment

E. Furnishings & fixtures

F. Other tangible asset value

G. Total tangible asset value (A through F)

H. Working capital needed

I. Tangible assets & working capital (G & H)

8. "Underlying" interest rate (use current inflation rate + 4 points).

9. "Cost of money"

A. Reenter tangible asset value + working capital from Line 7-1.

B. Reenter underlying interest rate from Line 8 (use decimal).

C. Multiply 9-A by 9-B.

10. "Excess Earnings"

A. Reenter stabilized earnings (Line 6).

B. Reenter "cost of money" (Line 9-C).

C. Excess earnings (Line 10-A less 10-B).

11. Calculate multiple (Refer to Chart 5 in text. Ratings are 0-6.)

A. Risk

B. Competitive

C.Industry

D. Company

E. Growth

F. Desirability

G. Total

H. Total/6

12. Value of excess earnings

A. Reenter excess earnings (Line 10-C).

B. Reenter multiple (Line 11-H).

C. Value of "excess earnings" (12-A X 12-B).

13. Total business value:

A. Reenter asset value (Line 7-G).

B. Reenter value of "excess earnings" (Line 12-C).

C. Total business value (13-A + 13-B).

Note: If this figure is used by a purchaser, he or she will have to provide any extra working capital to operate the business. The total business value as shown here includes inventory.

This figure does not apply to a stock purchase. The stock purchase value will be this figure (13-C) less total liabilities to be assumed. In addition, other adjustments may need to be made in the event of a stock sale if tax benefits are lost as a result by the buyer.