There are a variety of factors that go into the calculation of the valuation of a business. These considerations allow you to determine the general value of how much a business may be worth, whether you’re looking to sell, buy, or attract investors. There are also different formulas you can use when calculating business worth, which can include criteria such as business industry, annual sales and profits, and owner’s salary. You can use our business valuation calculator below to help you with these calculations.
If you’re looking for advice in preparing a valuation, consider an expert such as Guidant. With its business valuation services, you’ll be paired with a consultant who can walk you through the process and answer any questions you may have. For $495, its services include a customized business valuation report and an in-depth funding assessment.
Looking for a non-debt financing option? Consider a ROBS from Guidant |
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Business Valuation Formula
Our calculator’s formula involves using an income-based approach to estimating the value of a business. While this method is not the only way to determine value, it is a good starting point that can provide a rough estimate of value. That said, business owners may want to consider other valuation methods to get a better picture of what their business is worth.
Here are the business valuation formulas we used:
Annual Sales Multiple Formula
Seller’s Discretionary Earnings (SDE) Multiple Formula
Business Valuation Inputs
For the business valuation calculator we provided, the inputs required are inclusive of details that reflect various aspects of business information, mainly to do with industry, sales, and profit. These sections are detailed below:
Industry
For the first section, you’ll need to select the applicable industry that relates to the business. Choose the closest match if the exact industry associated with the business isn’t available as an option.
This step involves the multiplier that the calculator uses to generate the final valuation and can vary depending on the industry in which the business operates.
For example, a restaurant with $100,000 in sales or profits will be valued less than a medical practice with the same sales or profits. This is because a medical practice will typically be more stable and have a higher long-term success rate than a restaurant.
Last 12 Months Sales
The second section requires you to input the last 12 months’ worth of sales from the business. This information can typically be referenced from the most recent income statement of the business.
Keep in mind, the sales value should represent the total revenue generated by the business without the subtraction of expenses.
Last 12 Months Profits + Owner’s Salary
In the last section, you’ll input the last 12 months’ worth of profit—essentially the total revenue of the business minus its expenses. Typically, these values can be found in the most recent profit and loss statement.
You should also include the owner’s salary (as applicable) as an expense as part of this calculation.
One factor excluded from our calculator is assets, both tangible and intangible. While these are important elements of the valuation process, we deemed this step to be unnecessary for our income-based approach.
Assets can include real estate, equipment, inventory, etc., all of which can increase the potential value of your valuation. These factors may be better suited as part of an asset-driven valuation method or used in a professional valuation to iron out the details.
Business Valuation Outputs
Our calculator will provide you with two outputs, essentially offering an estimate of values based on both sales and revenue. Here’s what you can expect from these calculations based on your previously inputted values:
Business Value Based on Sales
The first output will give you an approximate value for your business based on the previously inputted annual sales multiplied by its associated industry sales multiplier.
For example, if you are selling a law firm that made $100,000 in annual sales, the industry sales multiplier is 1.03, and the approximate value is $103,000 ($100,000 × 1.03).
Business Value Based on Profits + Owner’s Salary
The second output will also give you an approximate value for your business based on the previously inputted annual profits multiplied by its associated industry profit multiplier.
Using the same example from above referencing a law firm, let’s assume the profits were $40,000. The industry profit multiplier is 1.99, so the approximate value is $79,600 ($40,000 × 1.99).
It’s important to note that there will be differences between the value of a business based on sales versus value based on profits. We’ve included both outputs to provide a variation of estimates for a range of potential values applicable to a business.
That said, some small businesses may benefit more from the profit-based value output since it’s likely to be a more accurate depiction of sales and operating expenses. Ultimately, this also means the profit potential of the small business may be lower compared with larger companies.
Pros & Cons of Using a Business Valuation Calculator
| PROS | CONS |
|---|---|
| It can be used as a simple tool to estimate a business’s value for both buyers and sellers. | Our calculator excludes business assets, which can make up a significant portion of the actual value of a business. |
| It can include an average industry multiple in the calculation, which is useful as not all industries have the same risks and opportunities. | For some businesses, market trends may vary and influence valuations. |
| By focusing on actual revenues and profits generated by a business, our calculator is based on a business’s bottom line. | A math-based calculation ignores factors like intangible assets and year-over-year growth. |
How a Business Valuation Works
A business valuation is essentially the total economic value your company has. This process involves analyzing various criteria within your business operations, including profitability, expenses, and growth trajectory.
This process typically takes place when there are opportunities to buy or sell a business. That said, it can be used in other situations or simply to have an idea of what a business could potentially be worth.
Factors That Go Into a Business Valuation
There are numerous considerations taken into account when performing a business valuation. This can include factors such as:
- Industry
- Net profit
- Company assets
- Real estate & lease terms
- Growth trends
- Business model
- Competitors
- Online and offline sales network
- Website traffic (if significant to your business model)
Business Valuation Methods
There are a wide variety of business valuation methods that can be used to estimate the value of a business. Generally, they fit within these three categories:
- Income-based approach: This is what we took with our calculator. Essentially, it evaluates the total amount of income a business generates currently, along with expected income projections for the future.
- Asset-driven approach: Some valuations can be made strictly using business assets. Basically, it calculates the difference between the assets of a business (inclusive of property, equipment, inventory, etc.) against its current liabilities.
- Market approach: With this, a valuation is based on the purchases and sales of similar businesses that are within the same industry. Naturally, it’s a comparison between businesses to determine what it might be worth in the future.
Who a Business Valuation Is Right For
A business valuation is applicable to both buyers and sellers of a business, as well as investors, and is a useful tool when determining whether a business has high growth potential and fits the budget of a buyer or what monetary value the seller can expect to receive upon the sale of the business.
Where to Get a Business Valuation
A business valuation can be sourced from a variety of providers, and preference can depend on how detailed a valuation you’re looking for. Generally, a business valuation can be provided by the business owner for a simplified valuation and general overview of the business, or through a more experienced provider such as a business appraiser, broker, or valuation specialist for a more comprehensive report.
For an official valuation, we recommend consulting an expert who can guide you through the process. You can utilize valuation specialists by visiting Guidant, our recommended provider.
Frequently Asked Questions (FAQs)
There are various methods to calculate your business’s valuation. By using our calculator, you can determine a ballpark value of the potential worth of your business with an income-based approach. This calculation, however, doesn’t consider assets or market trends, so it’s best to ensure that you compare methods before settling on a final valuation number.
Numerous factors can influence the number of times a business is worth its profit, including factors such as industry and development stage. Generally speaking, however, a small business can expect to typically be worth 1 to 2 times its annual profit.
Business valuations are commonly used by business owners looking to sell, buyers interested in acquiring the business, and investors looking for a stake in a business. While a valuation can take place in other instances as well, it’s generally a calculation that can be used to provide estimates of the overall value of the business for any applicable party who may be interested.
Bottom Line
When determining the value of a business, you can use a business valuation formula to calculate how much the business may be worth. While there are various methods to consider, you can use valuation estimates to better understand the total value of your business from either a buyer or seller standpoint. Using our business valuation calculator can aid with this process and, ultimately, help make important business decisions.
