# Lounge > Real Estate / Finance >  Value of a small business

## ExtraSlow

Looking at an opportunity for a group of investors, who may be interested in purchasing a local small business. It's an industrial service business that's been in operation 40 years by the same owner. I know the invstor guys know how to do this, but I want to educate myself. How would you value this small business?

- Owner operated with 2 unskilled laborers
- Steady work, lots of repeat business, but likely no long term contracts. 
- Some expensive capital equipment, all fully owned, but nothing custom or unusual. Probably $500k to buy new replacements
- Doesn't own the land/shop he operates out of. 
- Good potential of increasing the business, as he hasn't been putting much effort into that.
- No local competition, although several companies in other cities that do this service. 

If his Annual revenue is X, his costs are Y, and the depreciated value of his equipment is Z, what's his business worth? Thanks in advance, beyond university.

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## suntan

1X revenue at best, lower if there's substantial debt.

Is the business at least break even?

Does the business want to sell?

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## ExtraSlow

The owner wants to sell, and is open to consulting back if required. 
Does better than break even.

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## pheoxs

Not much IMO. The key issue is owner-operator means once hes out of the picture youve lost the main guy doing the work. Lots of your existing clients may not be happy to have different people show up for the next service work.

Also it says 2 unskilled workers, can they do the owners job or are they just shop grunts that help out here and there?

End of the day youre basically just buying the equipment and the client list since youre losing the main worker when he leaves. Whats your plan? Train the other 2 workers? Or can you find a replacement guy to do the work? If hes the only one doing it in Calgary, is finding a replacement guy going to be hard?

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## cycosis

Value is in the client list/contracts. Largely depend on his ability to convert his current business into formal contracts. How to value future cashflows if theres nothing agreed upon? Handshake deals with the owner himself are moot once hes out of the picture.

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## suntan

> The owner wants to sell, and is open to consulting back if required. 
> Does better than break even.



1X then. Anything higher than 1.2X is being extremely generous. Pay 50% now, keep him on at salary, don't pay him the rest of the buyout until he's fully trained two successors.

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> Value is in the client list/contracts. Largely depend on his ability to convert his current business into formal contracts. How to value future cashflows if theres nothing agreed upon? Handshake deals with the owner himself are moot once hes out of the picture.



Zero value. Zero. You as the buyer have to do the work. So what are you paying him for?

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## riander5

> 1X then. Anything higher than 1.2X is being extremely generous. Pay 50% now, keep him on at salary, don't pay him the rest of the buyout until he's fully trained two successors.
> 
> - - - Updated - - -
> 
> 
> 
> Zero value. Zero. You as the buyer have to do the work. So what are you paying him for?



Paying for any long term contracts that are in place and will stay with the business after it sells? You put zero value on this? Interesting....

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## suntan

OP says no long term contracts in place.

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## ExtraSlow

I'm liking the thoughts here. Agree that handshake deals with an owner who is leaving are not worth much if anything. That being said, there's a certain amount of inertia to industrial suppliers. It's often a pain in the ass to find, qualify and start-up with a new supplier. 

And this guy has little local competition, I happen to know because I was looking for an alternative to his services and came up empty. Shipping parts to facilities out of town is a pain in the ass too, but people could do it.

EDIT: I should clarify, right now I THINK there are no long term contracts, but I will obviously verify this. The glimpse I have into his work says each "job" is a a new informal agreement.

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## riander5

> OP says no long term contracts in place.



I would edit my comment, but reading > me so I will leave it as a reminder for all who tread after me.

No contracts, No skilled labourers. Im agreeing with Suntan on this one. The seller sounds like he has the ability to generate a good income for himself, but has he created a good, saleable business? Doesn't sound like it.

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## suntan

> I'm liking the thoughts here. Agree that handshake deals with an owner who is leaving are not worth much if anything. That being said, there's a certain amount of inertia to industrial suppliers. It's often a pain in the ass to find, qualify and start-up with a new supplier. 
> 
> And this guy has little local competition, I happen to know because I was looking for an alternative to his services and came up empty. Shipping parts to facilities out of town is a pain in the ass too, but people could do it.
> 
> EDIT: I should clarify, right now I THINK there are no long term contracts, but I will obviously verify this. The glimpse I have into his work says each "job" is a a new informal agreement.



Gotta crack open those books, look through his emails, papers, whatever. No contracts on paper = no money for him. 

Never do handshake deals. You never want to get into a he/she said with this sort of shit. Have lawyers that have experience in M&A draw up the paperwork.

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## mr2mike

Investment only or do we need steel toed Blundstones?


Business sounds like my ex's family business but then again... Like every small, family run business.
Creative accounting and not worth more than the last successfully bidded contract.

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## ExtraSlow

Yeah, we have "real" investment guys, and real lawyers who would do the actual deal. This group knows their shit. I'm advising on a couple technical aspects, but I don't want to be uninformed about the valuation part of the deal. Always want to add to my toolbox, you know? 

Might end up with steel toed blundstones too mike. you want a pair?

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## ThePenIsMightier

I believe it's usually sold on a multiple of EBITDA, isn't it?

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## killramos

It really depends on the type of business.

But yea if you are going to quote multiples Id do some kind of cash flow (EBITDA, DACF, AFF, FCF or whatever jumble of letters gets you Randy) over revenue.

Revenue multiples only fly in tech where no one actually makes any money.

All of the above is just lazy proxy for discounted cash flow analysis anyway, usually by people who dont know what their cost of capital is.

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## suntan

For these sort of small owner operated businesses revenue works better because they're sucking everything out of the company as a dividend/wage, so the only way you can convince them to sell is to give them that amount.

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## ExtraSlow

This is all super helpful. you guys are the best.

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## Tik-Tok

> Pay 50% now, keep him on at salary, don't pay him the rest of the buyout until he's fully trained two successors.



While I certainly have no personal experience in this type of thing, when my aunt and uncle sold their trucking business a decade ago (for 7 digits numbers) the written deal was that they receive 50% up front, and were paid the rest as monthly salary for one year (from a fund). That was enough time for them to train the new owners/staff, and make good solid connections between their existing clients and the new people.

There were some problems, but after a year everyone was happy and the business was a well oiled machine.

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## BavarianBeast

If it’s pipe coating I’d consider buying the business myself

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## suntan

> While I certainly have no personal experience in this type of thing, when my aunt and uncle sold their trucking business a decade ago (for 7 digits numbers) the written deal was that they receive 50% up front, and were paid the rest as monthly salary for one year (from a fund). That was enough time for them to train the new owners/staff, and make good solid connections between their existing clients and the new people.
> 
> There were some problems, but after a year everyone was happy and the business was a well oiled machine.



Yup those kinds of arrangements are very common.

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## mr2mike

> If it’s pipe coating I’d consider buying the business myself



Given the OP, probably a leather works or specialty wall anchor company.

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## TomcoPDR

> Given the OP, probably a leather works or specialty wall anchor company.



An art gallery?

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## B.Spilner

Mega art gallery

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## Buster

- Unless the industry has enough previous comparable sales to establish a convention of multiple of revenue, you work off of multiple of normalized cash flow (not EBIDTA).
- multiples of cash flow are a way to establish the value of the intangibles (goodwill) of the business, then inventory and other assets are added on top
- goodwill is determined by any number of things and doesn't have to be connected to contracts. In fact it is probably better if it is not. Things like overall customer loyalty, competition, potential for competition, barriers to entry, proprietary IP, access to patents, brand recognition are all factors which will determine what the buyer and seller might agree on as the price.
- for relatively niche small businesses you might see valuations in the .5x cash flow to 2.5x cash flow. More robust small businesses can fetch 8-10x cash flow, but this doesn't sound like one of those industries.
- Payout for the purchase does not need to be in cash, it can be financed by the vendor (ie payments to the vendor) which can include performance holdbacks
- non-competes are tough to enforce and can easily be circumvented, buyer beware, although easier to enforce in these circumstances
- asset sale over share sale if you can

blah blah blah, i could go on.

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## suntan

That’s all great but fact is the annual revenue is the cash flow. It’s basically a personal services business with a couple of employees. There is zero goodwill because the business is ad hoc based. 

It’s not even as complicated as a construction company, where your model makes sense because 90% of the revenue is cogs. 

I’d be stunned if revenue was even 300k. You guys are way overthinking this.

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## tonytiger55

Another way to determine the value in lazy form is to ask this question. _What exactly are you purchasing?_

He does not own the land or building. 
What is the cashflow of the business, how many years, _what_ is generating the cash. What is the volume goods/services sold? Is one vendor/supplier product more profitable than another? 
Ask for the business insurance documents. See if he has Business Interruption coverage, what has the insurance company valued it? What is the machinery valued on the replacement?
Relationships with vendors take various forms. Are there any contracts on this? What is the cost of business? Tax, lease, rentals, employee wages, insurance, banking fees etc. 
If you were to set up the business from scratch what would be the costs? Is it cheaper to lease a different building? Which leads to the other question...
Given the employees are unskilled labour, are you purchasing knowldge or is there a loss of knowledge? 
After going through that thoght excercise.. I think the value is determined by the knowledge of the owner. If he leaves, how much can the business run on its own? Does the owner have specialized knowledge...? The value is then determined on the _owner_ relative to the net profit. How easy is it to replace him?

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## ThePenIsMightier

And let's not forget the ol' non-compete clause...

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## killramos

If a business has no expenses then Revenue is Cashflow.

In which case cash flow is still the correct metric for valuation.

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## riander5

Id offer 50k, and tell the guy he still has to work the next 5 years, however he only gets half his current wage.

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## Buster

> That’s all great but fact is the annual revenue is the cash flow. It’s basically a personal services business with a couple of employees. There is zero goodwill because the business is ad hoc based. 
> 
> It’s not even as complicated as a construction company, where your model makes sense because 90% of the revenue is cogs. 
> 
> I’d be stunned if revenue was even 300k. You guys are way overthinking this.



Goodwill is determined in retrospect.

If ES and his consortium determine that they want to buy the business for $xxx over it's book value, then that's the goodwill.

It sounds like this business is an appealing acquisition for more than book value so the goodwill is by definition non zero.

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## ExtraSlow

This is all very helpful. 

Again, the team I'm working with has a deep background with this type of transaction. I'm just trying to educate myself, and these comments have been extremely helpful.

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## killramos

Let me know where to send the invoice for my work fee

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## ThePenIsMightier

> Let me know where to send the invoice for my work fee



I recall that make-up guy being there when I took that oath thing in the dark room holding those chains.

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## arcticcat522

I've often pondered something like this where I work. What would it be worth to sell? The thing that I always get stuck on is if there isnt anything proprietary, and no real barrier to entry, let her buck and go at it with out purchasing another company. I find it hard to put a price on a name with any small business. Figure out what the assets are worth. Pay that.

Have you ever heard of someone who purchased a portion of a company and gave it back to them after a few years. I have.......money well spent??

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## schurchill39

When we bought our new house we got all of the carpets professionally cleaned. My wife had it arranged way ahead of time with a guy who was recommended to her by a ton of people and he had a very good reputation for quality work. When the day actually came for our carpets to be cleaned it was someone completely different who showed up and said he just bought the company and we were his first clients on his own. He didn't do anywhere near the job we thought we were getting when we first booked in and had I known it was going to be a completely new guy I would have gone with a different company with some experience. 

That being said, I have always wondered how the original guy valued his business consisting of a van and the cleaning equipment and how much was put on the jobs that were prebooked in that 1 month time frame. I find it hard to believe that it would have been for much more than the value of the vehicle and equipment plus some sort of training retention fee. In talking to the dude who was actually doing the work it sounded like he was just buying himself a job which was even more confusing to me.

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## zechs

The joke of small business is that at least 50% of them you are buying yourself a job, except you have all the additional responsibilities and time requirements of being the boss vs working as a cog in the machine somewhere.

Everything that ES has said indicates to me, based on my experience on being involved in the buying and selling of a few small businesses, that the business has zero value.

The owner has value as an employee. Without him, I'd expect the "business" to crater within a year or two. Might as well just start your own business and cold call his clients.

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## Tik-Tok

No value at all?




> - Some expensive capital equipment, all fully owned, but nothing custom or unusual. Probably $500k to buy new replacements

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## themack89

Sounds like Bitcoin mining XD

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## ThePenIsMightier

> Sounds like Bitcoin mining XD



LoL!!

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## muse017

What is "Small Business"?

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## Marsh

> Looking at an opportunity for a group of investors, who may be interested in purchasing a local small business. It's an industrial service business that's been in operation 40 years by the same owner. I know the invstor guys know how to do this, but I want to educate myself. How would you value this small business?
> 
> - Owner operated with 2 unskilled laborers
> - Steady work, lots of repeat business, but likely no long term contracts. 
> - Some expensive capital equipment, all fully owned, but nothing custom or unusual. Probably $500k to buy new replacements
> - Doesn't own the land/shop he operates out of. 
> - Good potential of increasing the business, as he hasn't been putting much effort into that.
> - No local competition, although several companies in other cities that do this service. 
> 
> If his Annual revenue is X, his costs are Y, and the depreciated value of his equipment is Z, what's his business worth? Thanks in advance, beyond university.



Depends on a bunch of factors but generally 2-5x SDE/EBITDA. in this particular case, business value is next to none. Would pass on this deal.

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## ExtraSlow

I'm being deliberately misleading here on a couple of details, but y'all have given me the education I wanted. 

There's also a non-financial reason to purchase this business in terms of efficiencies and cost reductions for a different company. 

This is why I love beyond, a true wealth of knowledge.

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## Buster

> I'm being deliberately misleading here on a couple of details, but y'all have given me the education I wanted. 
> 
> There's also a non-financial reason to purchase this business in terms of efficiencies and cost reductions for a different company. 
> 
> This is why I love beyond, a true wealth of knowledge.



This changes everything

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## killramos

> This changes everything



“Don’t worry guys, I’ve timed this market perfectly”

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## ExtraSlow

Timing the market is my favourite asset class.

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## Bytem3

Owner operator IS the business and if he’s like 99% of all the other old school twits who think goodwill is a thing, the asking price will not ever make any sense and the business will wither and die with the owner

Almost as important as the business would be the real estate that it resides in. Is it a lease, is it owned by the O/O, does it sell too?

IMO unless there’s some grand plans to makes this take off, a group of people to buy this business should be approached with extreme caution 

It’s all a good idea until money decisions have to be made between partners

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## Buster

It ALL depends on the business.

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## ExtraSlow

Oh I've had two PMs asking me what company it is. I'm not telling. The deal may or may not happen, but I can gain nothing by being more specific, other than potential legal trouble. I got what I needed from this thread.

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## riander5

Cmon.. tell us

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## Tik-Tok

> Cmon.. tell us



https://www.realtor.ca/real-estate/2...gary-chinatown

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## suntan

> Goodwill is determined in retrospect.
> 
> If ES and his consortium determine that they want to buy the business for $xxx over it's book value, then that's the goodwill.
> 
> It sounds like this business is an appealing acquisition for more than book value so the goodwill is by definition non zero.



Gross. I would never want GW on the books for a business like this.

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## Buster

> Gross. I would never want GW on the books for a business like this.



A business like what?

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## suntan

> A business like what?



Three dudes that do ad-hoc work.

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## ExtraSlow

maybe it's a mismanaged social media company, currently too heavy with software engineers. 
.
Or maybe it's a tire installation business? 
.
or maybe it's a jewlery and watch retail store? 
.
or maybe hand-made cowboy boots? 
.
or maybe not today satan.

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## Buster

> Three dudes that do ad-hoc work.



You're making too many assumptions about the value of the business.

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## suntan

> You're making too many assumptions about the value of the business.



All I'm saying is that putting GW on the books is a bad strategy. Make it "management fees" or something that you can expense right away.

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## Buster

> All I'm saying is that putting GW on the books is a bad strategy. Make it "management fees" or something that you can expense right away.



Accounting isn't the relevant part of this discussion. If you are paying more than the assets on the books for a business, then you are paying for intangibles. You have no idea what that is worth without knowing the specifics of the business. If the owner won't sell it to you for less than X over book value, and you are willing to pay that, then bingo bango, the business has "goodwill value." The entire tech industry is built on this concept.

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## suntan

> Accounting isn't the relevant part of this discussion. If you are paying more than the assets on the books for a business, then you are paying for intangibles. You have no idea what that is worth without knowing the specifics of the business. If the owner won't sell it to you for less than X over book value, and you are willing to pay that, then bingo bango, the business has "goodwill value." The entire tech industry is built on this concept.



Yes if you want to discuss unicorns and sunshine your take is great.

Me? I want to maximize my after tax income. Your analysis is worthless for that.

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## Buster

> Yes if you want to discuss unicorns and sunshine your take is great.
> 
> Me? I want to maximize my after tax income. Your analysis is worthless for that.



Regular businesses have goodwill value - happens all of the time.

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## vengie

I have a small yoga and fitness studio I'd sell you.
Would be a great addition to the portfolio with the art room... Think about it, art room yoga!

For you, special price, much low.

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## riander5

> https://www.realtor.ca/real-estate/2...gary-chinatown



It says once in a lifetime opp.... Im in

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## Bytem3

> It says once in a lifetime opp.... Im in




Ready to franchise and expand

Right, because the opportunity to do so wasnt present in the first 31 years of being in business and the restaurant business in general is a license to print money

Delusional owner

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## zechs

> The entire tech industry is built on this concept.



*Looks at the tech sector stock market performance*

Apparently that goodwill value wasn't an actual thing, as Elon Musk learned.

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## suntan

> Regular businesses have goodwill value - happens all of the time.



Yes and that's not a good thing. It takes 20 years to depreciate goodwill. Get better accountants.

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## Buster

> Yes and that's not a good thing. It takes 20 years to depreciate goodwill. Get better accountants.



you probably should stop pretending you know about this stuff.

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## ThePenIsMightier

> you probably should stop pretending you know about this stuff.



Oh, so now _you're_ the expert in reading Shareholder's Agreements??!?
Pffftttt!

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## Maxt

If there is anything specialized or involves the current owner being a certified trade, the main asset of the company is him, and thus it's worth about 75% of one one years net. If you have to hire someone to take the guys position, no employee will put in the grind that the owner does.

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## suntan

> you probably should stop pretending you know about this stuff.



I'll be sure to let the buyers of our company know they should have a giant goodwill line item hanging over the b/s for time eternal.

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## Buster

> I'll be sure to let the buyers of our company know they should have a giant goodwill line item hanging over the b/s for time eternal.



Are you expecting the buyers of your company to pay you more than the book value of your assets? I presume so.

You're getting hung up on irrelevant wording, and missing the concepts.

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