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.
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.
For example, a business that is doing $300,000 in profit per year sold for at 2.44X would have a sale price of $732,000 ($300,000*2.44=$732,000). This works in reverse as well — if a business sold for $732,000 at 2.44X, then ($732,000/2.44) means the profit was $300,000.
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.
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.
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.
Current Value = (Asset Value) / (1 – Debt Ratio)
To quickly value a business, find its total liabilities and subtract them from the total assets. This will give you an idea of its book value. This formula estimates the worth of a business by looking at its assets and subtracting any liabilities.
A common way to value a private company is by using the Discounted Cash Flow (DCF) or a Comparable Company Analysis (CCA), and by taking into account factors such as financial performance, growth prospects, industry dynamics, and risk factors.
A business will likely sell for two to four times seller's discretionary earnings (SDE)range –the majority selling within the 2 to 3 range. In essence, if the annual cash flow is $200,000, the selling price will likely be between $400,000 and $600,000.
Market value: The simplest calculation and, therefore, the most common valuation method. It takes the current value of the business' shares and multiplies it by the number of shares that are currently outstanding. Asset-based: This method looks at your total net assets and deducts your total liabilities.
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.
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.
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.
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.
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.
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).
If the target store has annual revenue of $2 million, its estimated value would be $3 million.
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.
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.
Multiply the SDE or EBITDA of the business by a multiple. Common multiples for most small businesses are two to four times SDE. Common multiples for mid-sized businesses are three to six times EBITDA.