No. The value of a business is typically determined by some multiple of cash flow. In my experience, the multiple is generally in the range of 3 to maybe 5 times cash flow, depending on the industry. Obviously the more demand there is for a business will also impact the multiple. But again, this is the method for determining the value of a business. Once the value is determined and a Buy-Sell Agreement is negotiated, the new owner can start operating the business and collect the cash flow. Usually the business is purchased via a seller contract or bank loan (perhaps an SBA loan) and those payments are then made from cash flow. Some business owners think their business is worth more; in that situation a consultant can be hired to determine the value of a business. Some individuals think of the value of a business is based on the value of the assets, but that is not true. When you buy an established business, in effect you are buying future cash flow. The value of the assets that generate that cash flow is secondary.

I see the cash flow is often 1/3rd of the asking price of a business for sale. Do people buy a business and work for 3 years before making a profit and paying off their loan? Seems excessive!