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.
Current Value = (Asset Value) / (1 – Debt Ratio)
When it comes to determining the worth of a business, business owners often struggle with undervaluing or overvaluing their company.
The revenue multiple is the key factor in determining a company's value. To calculate the times-revenue, divide the selling price by the company's revenue from the past 12 months. This ratio reveals how much a buyer was willing to pay for the business, expressed as a multiple of annual revenue.
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.
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.
To find the fair market value, it is then necessary to divide that figure by the capitalization rate. Therefore, the income approach would reveal the following calculations. Projected sales are $500,000, and the capitalization rate is 25%, so the fair market value is $125,000.
Valuation specialists commonly assess a small business based on their price-to-earnings ratio (P/E), or multiples of profit. The P/E ratio is best suited to companies with an established track record of annual earnings.
A business in California might sell 2 to 3 times the seller's discretionary earnings. The fair market value is what the business would sell for on the free market.
EBIT multiples can range from 0.8 times FME to over 5 times, depending upon the industry, performance, and relative risk of the subject business.
A revenue valuation, which considers the prior year's sales and revenue and any sales in the pipeline, is often determined. The Sharks use a company's profit compared to the company's valuation from revenue to come up with an earnings multiple.
It is calculated by subtracting depreciation from the cost of the asset. Fair value represents the current market price that both buyer and seller agree upon. Carrying value reflects the firm's equity. This transaction benefits both parties.
Valuations are generally expressed as a multiple times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). For example, a business with EBITDA of $1 million and a multiple of 3 is valued at $3 million.
The formula used to calculate the present value (PV) divides the future value of a future cash flow by one plus the discount rate raised to the number of periods, as shown below.
One way to assess the value of a business name is to consider the cost of acquiring it through a domain name purchase, trademark registration, or any other legal fees. This can provide a tangible benchmark for the value of the name in the marketplace.
So as an example, a company doing $2 million in real revenue (I'll explain below) should target a profit of 10 percent of that $2 million, owner's pay of 10 percent, taxes of 15 percent and operating expenses of 65 percent. Take a couple of seconds to study the chart.
If you've outgrown your business or your business has outgrown you. If your industry is shrinking or you're looking elsewhere. If what you're doing could be better done within a partnership, it might be time to sell. Consider the options carefully and be sure the diagnosis is correct before you move forward.
In short, this method is all about calculating the multiples of net income. To calculate multiple net income, multiply your net operating income (NOI) by the net income multiplier (NIM) to calculate multiple net income. You'll arrive at your business's market value at which you'll sell. = NIM X NOI.
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.
A market-based valuation estimates the value of your business based on the value of similar businesses — ones of a similar size and in a similar industry. Market valuations may be based on comparisons to similar publicly traded companies or recent sales of comparable businesses.
The times-revenue method determines the maximum value of a company as a multiple of its revenue for a set period of time. The multiple varies by industry and other factors but is typically one or two. In some industries, the multiple might be less than one.
Using this basic formula, a company doing $1 million a year, making around $200,000 EBITDA, is worth between $600,000 and $1 million. Some people make it even more basic, and moderate profits earn a value of one times revenue: A business doing $1 million is worth $1 million.