How to Determine the Value of Your Business & Why It's A Good Idea to Know (2024)

FAQs

How to Determine the Value of Your Business & Why It's A Good Idea to Know? ›

A common rule of thumb is assigning a business value based on a multiple of its annual EBITDA (earnings before interest, taxes, depreciation, and amortization). The specific multiple used often ranges from 2 to 6 times EBITDA depending on the size, industry, profit margins, and growth prospects.

A common rule of thumb is assigning a business value based on a multiple of its annual EBITDA (earnings before interest, taxes, depreciation, and amortization). The specific multiple used often ranges from 2 to 6 times EBITDA depending on the size, industry, profit margins, and growth prospects.

"It's helpful for the seller to know the range of value they might expect if they expose their company to the marketplace." Notably, independent valuations also are vital in defending against any IRS challenge to the sale price after a transaction — a particular risk when transferring a business to family members.

Generally, a small business is worth 1-2 times its annual profit. However, this number can be higher or lower depending on the circ*mstances. If the business is in a high-growth industry, for example, it may be worth 3-5 times its annual profit.

To accurately ascertain a business's value efficiently, calculate its total liabilities and subtract that figure from the sum of all assets—the resulting number is known as book value. This approach to calculating company worth takes into account both existing assets and any outstanding liabilities.

There are four common methods used to value a business: market-based, asset-based, ROI-based, and expected future earnings-based valuation.

The Revenue Multiple (times revenue) Method

A venture that earns $1 million per year in revenue, for example, could have a multiple of 2 or 3 applied to it, resulting in a $2 or $3 million valuation. Another business might earn just $500,000 per year and earn a multiple of 0.5, yielding a valuation of $250,000.

Base it on revenue.

Calculate that and determine, through a stockbroker or a business broker, how much a typical business in your industry might be worth for a certain level of sales. For example, it might typically be about two times sales.

The Net Book Value (NBV) of your business is calculated by deducting the costs of your business liabilities, including debt and outstanding credit, from the total value of your tangible and intangible assets.

How much is my business worth to sell? ›

Take your total assets and subtract your total liabilities. This approach makes it easy to trace to the valuation because it's coming directly from your accounting/record keeping. However, because it works like a snapshot of current value it may not take into consideration future revenue or earnings.

Understanding your worth begins with self-awareness. It involves recognizing your strengths, weaknesses, values, passions, and goals. Knowing what makes you unique as an individual and as a professional is the foundation upon which you can build your self-esteem and confidence.

Asset-Based Valuation is a method used in company valuations to determine a company's worth based on its tangible assets. This approach calculates the company's value by summing up the value of its assets and subtracting its liabilities. Tangible assets may include property, equipment, inventory, and investments.

Use Revenue or Earnings as Your Guide

For example, if the industry standard is "three times sales" and your revenue for last year was $500,000, your revenue-based valuation would be $1.5 million. Multiplying your earnings, or how much your business makes after subtracting its costs, is another valuation method.

Main Street Deals (Sub $3m Revenue)

Companies with under $3m in sales will typically sell for 2.5 – 3.5 X their discretionary earnings (total cash the owner could take out of the company). Smaller companies that are even more owner-reliant will even be lower than that.

Factors affecting small business valuation

Thus, buyers have to approach the deal as if they are purchasing a job. Businesses where the owner is actively-involved typically sell for 2-3 times the annual earnings of the company. A business that earns $100,000 per year should sell for $200,000-$300,000.

Base it on revenue.

How much does the business generate in annual sales? Calculate that and determine, through a stockbroker or a business broker, how much a typical business in your industry might be worth for a certain level of sales. For example, it might typically be about two times sales.

Common multiples for most small businesses are two to four times SDE. Common multiples for mid-sized businesses are three to six times EBITDA.

The Main Idea

The "1% Rule" is if you can just consistently and persistently be 1% better at what you do each day, over the course of a year or a decade you will make significant progress.

Asset Method: This method is simply calculated by taking the difference between business assets and liabilities. For example, if you have $100,000 in assets and $20,000 in liabilities, the value of your business is $80,000 ($100,000 – $20,000 = $80,000).