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.
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.
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.
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.
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.
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 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 financial advisor calculates the ideal selling price using the formula:Selling price = (cost) + (profit margin) = ($350) + ($122.50) = $472.50.
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.
Because selling your business is such a complicated process, It can take an average 6-9 months to sell a small business, and many don't end up selling. Many small business owners have a lot on the line, as 80-90% of their net worth is tied up in their business.
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.
How can one find out how much a company was bought for? If the acquirer or the target is a public company, you will typically be able to mine information on the transaction from SEC filings on sec.gov. Simply search for filings by the public company ticker.
In general, the average revenue is around $44,000 per year for a company with a single owner/employee. Two-thirds of these small businesses make less than $25,000 per year.
Asset-Based Valuation
Description: This method determines a business's value based on its net assets. It calculates the value by subtracting liabilities from the business's total assets. Methods: Book Value: Relies on balance sheet values, a straightforward method that may not reflect true fair market asset values.
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.
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.
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).
A service-based business with $1 million in sales was valued at 2x revenue due to its reliance on human capital and limited scalability. Despite strong profitability, the business's valuation was $2 million, highlighting the importance of industry-specific factors in determining value.
Reasonable Price means a decision that is mutually agreed upon by a buyer and seller, reflecting market realities and the bargaining powers of the parties. This price provides the best total value considering availability, delivery time, fitness for purpose, payment terms, quality, quantity, and service.
Typically, most resellers aim for a 50% margin, which means that they want to make a 50% profit on each item they sell. For example, suppose you find a product that you can buy for $10. If you want to make a 50% profit on that product, you would add your costs and then multiply the total by 1.5.
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.
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.