Simply multiply the average net income by the industry multiplier to arrive at the estimated company valuation. By using the Profit Multiple Valuation method, you can obtain a comprehensive and accurate valuation of your company based on its net profit and industry standards.
Times revenue method
The multiplier typically ranges between 0.5 and 2, with lower values used for slower-growing industries and higher values for industries anticipated to grow rapidly. It's a good idea to consult with an independent financial advisor to determine the appropriate multiplier for your specific industry.
It is commonly used when selling and buying businesses, as it helps establish a fair market value for the company being sold or bought. Generally speaking, businesses sell for between three and six times their EBITDA (earnings before interest, taxes, depreciation, and amortization).
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.
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.
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.
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 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.
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.
While $3 million in sales is certainly impressive, it doesn't automatically translate to a specific valuation. The true worth of your business depends on a complex interplay of factors, including: Profitability: Your net profit margin (after all expenses) is a critical driver of value.
Add up the value of everything the business owns, including all equipment and inventory. Subtract any debts or liabilities. The value of the business's balance sheet is at least a starting point for determining the business's worth.
This multiple can vary widely depending on the industry, growth potential, and market conditions. In the tech and SaaS industries, for instance, startups might be valued at 5 to 10 times their annual revenue.
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.
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.
Although profit margin varies by industry, 7 to 10% is a healthy profit margin for most small businesses. Some companies, like retail and food, can be financially stable with lower profit margin because they have naturally high overhead.
The price earnings ratio (P/E ratio) is the value of a business divided by its profits after tax. You can value a business by multiplying its profits by an appropriate P/E ratio (see below). For example, using a P/E ratio of five for a business with post-tax profits of £100,000 gives a valuation of £500,000.
You might be wondering, how much does the average business owner make? According to PayScale, the average small business owner income is $70,781 per year. But, total earnings can range from $31,000 – $150,000 per year.
Reinvestment takes careful consideration. If you ask around, experts tend to recommend reinvesting anywhere from 20 percent up to 50 percent or even 70 percent of your profits back into the business.
If the target store has annual revenue of $2 million, its estimated value would be $3 million.
The 1% Rule is simply this - focus on growing your business by 1% every day, and compounded, means your business gets 3,800% better each year. Sir Dave Brailsford, former performance director of British Cycling, revolutionized cycling using this theory.
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.
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. Bring it all together. Next, we determine the expected value of the business by multiplying the company's SDE figure by the determined multiple.
Additionally, statistics show that the top 2% of the United States population has a net worth of about $2.4 million. On the other hand, the top 5% wealthiest Americans have a net worth of just over $1 million. Therefore, about 2% of the population possesses enough wealth to meet the current definition of being rich.
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.