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.
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.
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.
The three most common investment valuation techniques are DCF analysis, comparable company analysis, and precedent transactions.
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.
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.
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.
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 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.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization and is a metric used to evaluate a company's operating performance. It can be seen as a loose proxy for cash flow from the entire company's operations.
Market-based approach: This method compares the business to similar businesses that have been sold recently. To use this approach, research the sale prices of similar businesses and adjust for any differences in size, industry, location, and other relevant factors.
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.
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.
This module examines the traditional property valuation methods: comparative, investment, residual, profits and cost-based. There is also an introduction to modern methods of valuation.
As mentioned, the most typical rules of thumb are based on a multiple of sales or earnings that other similar businesses have sold for. For example, an accounting firm generating $200,000 in revenues that should sell at 1.25 times (125% of) annual sales would have an asking price of $250,000.
Common multiples for most small businesses are two to four times SDE. Common multiples for mid-sized businesses are three to six times EBITDA.
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.
For example, if a company has SDE of $150,000 and it sold for $300,000, it sold for 2x seller's discretionary earnings. The typical range for a small business is 1.5 to 3x SDE. Higher earnings, fast growth, and stellar margins can all help to increase the multiple.
To estimate the total value of the business, the present value of the exit price is added to the present value of the estimated near-term earnings or cash flow. All of this happens in mere minutes on television… but this is just one method for determining value.
Calculating ownership percentages by valuation
The ownership percentages will depend on whether the valuation is pre-money or post-money. If the $10 million valuation is pre-money, the company is valued at $10 million before the investment. After (post) the investment, the company will be valued at $12.5 million.
One of the most notorious (and successful) Shark Tank rejects started as a video doorbell name Doorbot. After a famously tepid reaction from the sharks, Amazon later bought the company for a deal worth nearly $1 billion. By early 2018, the company introduced a smart home doorbell dubbed Ring.