A valuation rate, often referred to as a discount rate in valuation, determines the present value of future cash flows, typically calculated as: π = πΆ πΉ π β π π = πΆ πΉ π β π (where π π is Value, πΆ πΉ πΆ πΉ is Cash Flow, π π is the discount rate/required rate of return, and π π is the growth rate).
The valuation of a company based on the revenue is calculated by using the company's total revenue before subtracting operating expenses and multiplying it by an industry multiple. The industry multiple is an average of what companies usually sell for in the given industry.
Revenue multiple is the most straightforward valuation method used on Shark Tank. It's typically the first thing the Sharks calculate when hearing a pitch. To calculate the revenue multiple, divide the proposed company valuation by annual revenue.
What is the formula for the business valuation ratio? A common business valuation ratio is the Price-to-Earnings (P/E) ratio, which is calculated as: P/E Ratio = Market Price per share / Earnings per share. This ratio is often used in the market-based valuation approach.
Most common valuation method: EBITDA Multiple Method
Once you have your EBITDA, tack on a multiplier β usually between 1x to 20x β based on what's appropriate for your industry. A quick web search will help you find yours. The product is your business value. In the example below, we use 4x as the multiplier.
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.
Having 5% equity in a company means owning 5% of the company's total shares or value. As an equity holder, you are entitled to 5% of the company's profits (through dividends) and would receive 5% of the proceeds if the company is sold, after accounting for debts and liabilities.
The founders who famously turned down a $30 million offer on Shark Tank were the sisters behind the dating app Coffee Meets Bagel (Dawoon, Arum, and Soo Kang) in 2015, with Mark Cuban offering to buy the whole company, the biggest in the show's history, but they declined to keep control and grow it themselves. As of 2025, their company's net worth was estimated at $150 million, with annual revenue around $36 million, showing they made a successful decision.
Negotiation Tips for Founders
Our small business valuation calculator is a tool that helps business owners and entrepreneurs estimate their business's value by considering financial metrics like revenue, profit, and market trends. Our free business valuation calculator estimates your business's current value using the "Discounted Cash Flow" method.
12 common valuation mistakes
The answer isβit depends. According to the Corporate Finance Institute, the average net profit for small businesses is 10%, while 20% is considered good.
For example, a business with an annual revenue of $200,000 and a valuation multiple of 2.5 would have a value of $500,000. However, the accuracy of a revenue-based valuation relies heavily on selecting the right multiple for your business.
The most common way to value a business that doesn't have assets is the market-based business valuation model. This finds the business's current market value by comparing it to other similar companies that have sold recently.
The most commonly used rule of thumb is simply a percentage of the annual sales, or better yet, the last 12 months of sales/revenues.
Determining Your Business's Market Value
Allow us to introduce the βFour Pillars of Valueβ: revenue, cost, risk, and time. These pillars are not mutually exclusive but together form a robust framework to articulate and maximize value. Let's break them down and see how they specifically apply to the legal services industry.