How to Value a Company: 6 Methods and Examples

business valuation formula

These are non-essential expenses—you incurred them in the course of doing business, but they were one time transactions, not essential for keeping Fizz Off in business. The more information you have about your business, the more accurate your calculations will be when you value it. There are multiple ways to find the economic value of your business, with different calculations that can be used for different purposes. In the U.S., Accredited in Business Valuation (ABV) is a professional designation awarded to accountants such as CPAs who specialize in calculating the value of businesses. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader.

Learning how to value a business is the process of calculating what a business is worth and could potentially sell for. One common method used to value small businesses is based on seller’s discretionary earnings (SDE). This method can be used to value a business for sale as well as raising capital.


Conducting a valuation is an excellent opportunity to assess the financial health and potential of your business, or of a business you’re hoping to buy. Along with doing financial legwork, valuing your business also requires you to exercise control over any emotions. Particularly if this is your first company, or if you run a family-owned and operated business, take care to approach valuation as objectively as possible to come to an accurate number.

  • You can find this number on the business’s latest profit and loss statement.
  • He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.
  • As a business appraiser, I understand that most business owners looking to sell as a going concern are simply looking for a quick way to determine the fair market value of their businesses.
  • Company valuation, also known as business valuation, is the process of assessing the total economic value of a business and its assets.
  • Next, you might use an asset-based business valuation method to determine what your company is worth.

Most experts we’ve talked to say that sellers set the asking price for their business too high. Nevertheless, due to Missouri’s positive economic climate, Joe’s business-specific multiplier is a little higher than the industry standard, at around 2.0. Although it does not have a very high multiplier, the real estate value actually makes the investment a pretty good one. The availability of seller financing also has an impact on the sales price multiplier. In nearly 80% of cases, a business has some kind of seller financing option available to the buyer. This is typically around 30% to 60% of the overall business value or purchase price.

Tangible Assets vs Intangible Assets

This being said, if you need to determine the value of your business, it’s worth understanding how this process works—even if you ultimately decide to hire a professional. In this guide, therefore, we’ll break down the seven most common business valuation methods, how What is Legal Accounting Software For Lawyers they work, and how each approach may (or may not) be beneficial to your small business. Generally, the valuation process analyzes all aspects of the business, including the company’s management, capital structure, future earnings and the market value of its assets.

A business valuation calculator is a helpful tool in this process, particularly when trying to determine if you can afford to buy a business or, on the other hand, if the business is worth its asking price. As a business appraiser, I understand that most business owners looking to sell as a going concern are simply looking for a quick way to determine the fair market value of their businesses. These similar businesses, often referred to as “comparables” or “comps,” can orient you within the marketplace and provide context about the sector. Knowing your peer companies will also help you assess your market share and growth potential. Then, you can demonstrate to potential buyers what makes your business stand out. As we mentioned earlier, a business’s SDE multiple — and the method of valuation — varies according to a few factors, including the strength of the industry.

Asset business valuation formulas

Choosing the best business broker for your situation also takes away many of the headaches that would otherwise fall on you. A company valuation can be used to determine the fair value of a business for a variety of reasons, including sale value, establishing partner ownership, taxation, and even divorce proceedings. Owners will often turn to professional business evaluators for an objective estimate of the value of the business. In this case, debt represents investments by banks or bond investors in the future of the company; these liabilities are paid back with interest over time.

business valuation formula

Hence, 15% becomes the compounded discount rate that you apply to all future cash flows. It’s key to determine what your market multiple is, and having access to successfully completed transactions is vital in this research. You’ll likely need to see a business broker who has the certified business intermediary (CBI) designation, or a mergers and acquisition specialist. Both of these professionals can look up the average market multiple for your industry and adjust it up or down based on the individual characteristics of your company and circumstance. A lot of training and professional standards go into determining this, so when the time is right to list and sell your business, don’t rely on 2.28 just because it’s the market average. Another common method attributes value to a business based solely on its assets.

Best Valuation Formulas to Determine the Value of a Private Company

Robert has over 15 years of experience in sales leadership, finance, and business development. He recently spent six years leading a team of small business financing professionals, facilitating the deployment of critical capital to over 9,000 small businesses across the US. A good business broker can also access many more business opportunities than you can by yourself due to their experience and extensive network. A good place to start is with a nationwide business broker network, where listings are shared between brokers across the country.

  • The valuation formulas for the asset accumulation method are essentially a set of adjustments that you make to the book values of the business assets and liabilities.
  • When you are about to buy a whole business or have someone invest in your business, analyzing the expected discounted cash flows can help you decide which investments are worthwhile and which ones are not.
  • The income approach to business valuation determines the amount of income a business can expect to generate in the future.
  • Because you’re familiar with your own equipment and production, you can make pretty accurate estimates of each of your asset’s value and depreciation.

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