Business brokerage is a specialized field within California real estate. When a business sale involves real property (owned or leased), a California real estate license is required. When a business sale involves the sale of stock (equity interests in a corporation), a securities license may also be required. Business brokers operate at the intersection of real estate, finance, and business law — and must understand valuation methods that differ substantially from real property appraisal.
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Real property valuation uses market comparables, the income approach (cap rates), and the cost approach. Business valuation requires different frameworks because a business's value is:
A building can be valued without knowing who operates inside it. A business cannot.
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The income approach is the dominant method for business valuation.
Formula: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Multiple applied: Industry-specific; typically 3–8× EBITDA for small-to-mid-market businesses. Technology businesses may trade at higher multiples; restaurants and retail at lower.
Example: A small manufacturing company with $500,000 EBITDA and an industry multiple of 4× = $2,000,000 enterprise value.
Formula: SDE = Net Income + Owner's Salary/Compensation + Non-recurring expenses + Depreciation/Amortization + Interest + Perks run through the business
Why SDE? Small business owners often run personal expenses through the business and pay themselves below-market salaries to minimize taxes. SDE "adds back" these items to show true cash flow available to a new owner.
Multiple applied: Typically 1.5–3× SDE for small businesses. Higher for more stable/established businesses; lower for high-risk or owner-dependent businesses.
Example: A car wash with $200,000 net income, $80,000 owner salary, $20,000 depreciation = $300,000 SDE × 2.5 = $750,000 value.
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The asset approach values a business based on what its assets would fetch if sold:
For most profitable going concerns, the asset approach establishes a floor value — a buyer won't pay less than the liquidation value unless they're overpaying for a business to be shut down.
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Similar to real estate's comparable sales method, the market approach compares the target business to recently sold similar businesses:
Combining the market approach with the income approach provides a "sanity check" on valuation.
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Goodwill is the intangible value of a business above and beyond its identifiable assets — it represents the premium paid for brand, customer relationships, reputation, workforce, and ongoing concern value:
Personal Goodwill: Attached to the owner as an individual. If the business is a professional practice (CPA, dentist, attorney) that depends entirely on the owner's relationships and reputation, much of the goodwill may be personal and non-transferable. Personal goodwill may not survive a sale — it walks out the door with the seller.
Enterprise Goodwill (Commercial Goodwill): Attached to the business entity itself — the brand, customer contracts, systems, and processes that will survive an ownership change. Enterprise goodwill is transferable and valuable to a buyer.
When valuing a business, separating personal from enterprise goodwill is critical. A dentist's practice may have $500,000 in "goodwill" on the books, but if 90% of patients are loyal to the dentist personally, a buyer acquiring the practice gets little enterprise goodwill.
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A covenant not to compete (non-compete) is an agreement where the seller promises not to open a competing business in the same market for a specified period after the sale. In California:
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A business buyer's due diligence checklist:
Financial:
Legal:
Operational:
Customer:
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Quiz Questions:
Q1. A small restaurant owner reports $60,000 in net income, but also pays herself $70,000 in salary, runs $15,000 in personal car expenses through the business, and has $10,000 in depreciation. What is the SDE?
A) $60,000 B) $130,000 C) $145,000 D) $155,000
Answer: D — SDE = Net income + Owner salary + Personal expenses + Depreciation = $60,000 + $70,000 + $15,000 + $10,000 = $155,000. All owner-benefit items are added back to show true cash flow available to a new owner.
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Q2. A California business owner wants to sell her dental practice and include a non-compete agreement preventing her from practicing dentistry within 10 miles for 3 years. Under California law:
A) The non-compete is void — California BPC §16600 makes all non-competes unenforceable B) The non-compete is enforceable — California allows non-competes in connection with the sale of a business as a statutory exception to BPC §16600 C) The non-compete is void unless she is an employee of the new owner D) The non-compete is enforceable only if limited to 1 year
Answer: B — California Business and Professions Code §16601 creates a specific exception allowing non-compete agreements in connection with the sale of a business. These are enforceable if reasonable in scope. The §16600 prohibition applies to employment non-competes, not sale non-competes.
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Q3. A manufacturing company has EBITDA of $800,000. Comparable businesses in the industry trade at 4–5× EBITDA. What is the indicated enterprise value range?
A) $800,000 – $1,200,000 B) $3,200,000 – $4,000,000 C) $1,600,000 – $2,000,000 D) $4,000,000 – $5,000,000
Answer: B — Enterprise value = EBITDA × Multiple = $800,000 × 4 = $3,200,000 and $800,000 × 5 = $4,000,000. Range: $3.2M – $4.0M.
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Q4. During due diligence for a restaurant purchase, the buyer discovers that 75% of the restaurant's revenue comes from a catering contract with a single corporation that is expiring in 3 months and may not be renewed. This is an example of:
A) Goodwill concentration B) Customer concentration risk — a significant risk factor that should reduce the valuation C) Normal business operations that the buyer must accept D) Enterprise goodwill that transfers with the business
Answer: B — High customer concentration (significant revenue dependent on one or few customers) is a major risk factor in business valuation. This discovery should lead to significant price renegotiation or deal contingencies (e.g., requirement that the contract be renewed before closing).
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Q5. A buyer wants to purchase a corporation by buying all of its stock. The seller is a California business broker. Does the broker need a securities license in addition to a real estate license?
A) No — selling business interests never requires a securities license in California B) The sale of corporate stock is a securities transaction; the broker may need a securities license unless an exemption applies C) Yes — all business brokers in California are required to hold FINRA Series 7 licenses D) No — a real estate license covers all business sale activities including stock sales
Answer: B — The sale of corporate stock constitutes a securities transaction. California securities laws may require the broker to be licensed as a securities dealer unless an exemption applies (e.g., the "business broker exemption" under California Corporations Code §25206, which provides limited exemptions for bona fide business transactions). This is a nuanced area requiring legal advice.