Deciding how much your business is worth is vital in maximizing your payout when you sell your business. There are two common ways get a rough business valuation: multiply either your annual sales or your annual profits by your industry’s average multiple. Our business valuation calculator below will help you calculate both.
Factors That Go Into A Business Valuation
Getting a ballpark value by using the business valuation calculator above will be useful to buyers, sellers, brokers, and other parties who need a quick estimate. However, you may want a more detailed analysis of what your business is worth, instead of just a thumb in the air estimate. In order to get that you’ll have to find a professional, which often can cost tens of thousands of dollars.
Many business brokers will offer a free business valuation to business owners that are ready to sell their business, especially those businesses with net cash flow of above $100k. These valuations will take significantly more information into account than most business valuation calculators, increasing their accuracy. The factors most brokers will take into account when assessing your business include:
- Net Profit
- Growth Trends
- Website Traffic (if significant to your business model)
- Age of Business
- Online and Offline Sales Network
- Business Model
- Company Assets
How To Use The Business Valuation Calculator
If you’re a buyer, this business valuation calculator is designed to tell you whether the business you want to purchase is in the realm of affordability. If you’re a seller, the calculator is a reality check. Essentially it gives you an estimation of what price you can charge if you want to attract potential buyers.
Here’s a simple breakdown of how to use the valuation calculator properly:
Business Valuation Calculator Inputs
The inputs in the calculator are the boxes where you must add information about your business. Below we analyze what you should include in each category.
Select the industry to which the business you’re buying or selling belongs. If the exact industry is not there, choose the closest match. This is an important step because the multiplier that the calculator uses to come up with the final valuation will vary based on the industry the business belongs to.
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
Type in the business’s sales over the last 12 months. This can be found by looking at the latest income statement. Sales are the revenue that the business generates before subtracting any expenses.
Last 12 Months Profits + Owner’s Salary
Profit is your revenue minus expenses. You can find this number on the business’s latest Profit & Loss Statement. Add in the owner’s salary as well before inputting this number into the calculator.
Business Valuation Calculator Outputs
The outputs are the fields provided after the calculation is done, displaying what your potential value could be. The business valuation calculator only has two output fields.
Business Value Based on Sales
Our calculator will give you an approximate value for your business by taking the annual sales and multiplying it by the appropriate industry 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 $100,000 (x) 1.03 = $103,000.
Business Value Based on Profits + Owner’s Salary
Our calculator will also give you an approximate value for your business by taking the annual profit and multiplying it by the appropriate industry multiplier. Taking the same example of a law firm, suppose the profits were $40,000. The industry profit multiplier is 1.99, so the approximate value is $40,000 (x) 1.99 = $79,600.
Note that there will always be a discrepancy between the business value based on sales and the business value based on profits. The two numbers give you an approximate range of potential values for your business. For some small businesses, the profit-based number will be more accurate because the business may have a lot of sales but also a lot of operating expenses. This means the ultimate profit potential of the business is quite low.
What’s Not Included In The Calculator
Our business valuation calculator, and most others across the web, are math-based calculators that take average industry multiples and combine them with revenue or profit numbers. While this can give you a rough estimate of what your business may be worth, there is plenty that the calculator doesn’t consider.
Many of the things that a calculator can’t take into account are the soft or intangible assets of the business. Intangible assets won’t be found on your books and are typically difficult to value. While it might be hard to put an exact value to them, they are usually very important to the ongoing operation of the business.
Our calculator also doesn’t take into account the value of your business’s assets, which could increase the value of your organization. This includes things like commercial real estate, machinery and equipment, technology, and more. Basically anything that has a value and could be sold off if the business was liquidated at some point in the future.
“Valuation is all about analyzing the company’s ability to produce future cash flow, combined with what the market value for their business is selling for. The short term goal to selling a business is to increase sales and profit, but valuation is a combination of where the business is right now and where it could go.”
— Jock Purtle, Founder of the business brokerage Business Exits
It’s difficult to determine an accurate business valuation without taking into account the current market, market trends, and all of the assets owned by the business. Here’s a list of things that most calculators don’t take into account, but that could increase the valuation of your business:
- Commercial Real Estate
- Large Equipment
- Furniture & Fixtures
- Current Inventory
- Patented Technology
- Public Perception
- Customer Lists
- Supplier Relationships
- Management Team Experience & Knowledge
- Public Brand Awareness
Some intangible assets are difficult to put a price tag on, but they should be valued. It takes a business broker, or M&A expert with dealmaking experience, to truly determine what these assets could be worth in your industry. Not only will an accurate valuation help you set a price for your business, it will also play a significant role in what financing options a potential buyer may have. Accuracy is of the utmost importance.
Next Steps To Getting Your Business Valued
You should now know whether you can live with just having a ballpark valuation, or if you need to get more of an exact determination of what your business is worth. If you need to be more precise, than you typically have two different options to move forward with a detailed business valuation:
1. Do it Yourself
You could try to determine what the value of your business is by yourself. Generally, you’ll need a good amount of experience valuing businesses to come to a solution. However, you may be able to go the DIY route if you start by calculating your SDE (Seller’s Discretionary Earnings). This can be a starting point to getting a precise value instead of using your sales or profits to get a thumb in the air number.
Seller’s Discretionary Earnings (SDE) are the profits of the business with certain expenses added back in to give a more accurate picture of the business’s profit making potential for a new owner. Read our article on how to value a business for more information on how to use SDE to value your business all by yourself.
2. Hire a Business Broker
The better solution for most small business owners, and buyers, is to hire a professional to determine the value of your business. Not only does it give you a value you can be confident about, but these professionals can typically get you more accurate data based off the number of deals they’ve done and the M&A groups they belong to.
A broker with experience selling businesses in your industry knows the most important number when valuing a business – what buyers are willing to pay for your business. No matter what you believe your business is worth, a broker can identify what your true sale potential is, and can typically do it quickly. This way you don’t waste lots of time in a sale process that won’t ever get you to the number you want.
Tips For Sellers
If you’re looking to get a business valuation so that you can sell your business, then you’ll likely want to know how to maximize the sale price. Here’s our top three tips to help you maximize the value of your business and get the best sale price possible:
1. Prepare for the Sale
Start preparing long before you put the business up for sale. Get your books in order, and make sure there aren’t any accounting or reporting mistakes. These can slow down the sale process, and make it difficult to maximize your value. The less things that look wrong when your business is analyzed, the easier it will be to get to closing.
Also, when you’re ready to sell, make sure you have the right documentation ready to go before approaching a business broker. This will speed up your process, and give the broker more confidence that they can count on you being ready when you need to provide more information to them later. You should have these documents ready when you approach a broker:
- 2+ Years of Business Tax Returns
- Current P&L (profit and loss statement)
- Current Balance Sheet
2. Use a Business Broker
Using a broker not only will set your expectations at an acceptable level, but it could also make or break your entire sale. An experienced broker will be able to maximize the value in your sale and get you the largest sum possible for your business. Brokers are often able to get much larger sale amounts than you’re able to get on your own.
A broker also takes away a lot of the headache that would otherwise fall on you. They handle administrative work, marketing your business for sale, handling communications with potential buyers, and negotiating both sales prices and final contract terms. Meanwhile, you can stay focused on operating your business, and continuing to maximize its value until it’s time to close.
3. Don’t Let Your Emotions Impact the Sale
Your business can feel like an old childhood friend, or even a family member because of the amount of time you’ve spent working in it. You’ve likely poured your heart and soul into making the business what it is today. However, according to Jock, “The market is the market.”
This means that your business is going to get the value that the market dictates based on your performance, the current economy, and the industry. Being emotional about what potential buyers value your business at isn’t going to help you get to closing. Put yourself in the buyer’s shoes, and don’t get emotional if you want a smooth sales process with a maximum price.
Tips For Buyers
Buying a business can often be even more complicated than selling, because you may not be familiar with the industry or business which you’re buying. Keep these tips in mind as you look for the right business to purchase:
1. Find an Industry with Potential
While you may pay more for a business in an industry with high multiples, it’s also more likely to hold it’s value. This means that when you’re ready to sell the business in the future you should still be able to get a higher sales price for it, especially if you choose an industry with high future growth potential.
2. Ask for Seller Financing
Seller financing is when the seller gives you a loan for part of the purchase price. This can lower the financing amount you need to close the transaction, and you’ll typically get it at a cheaper cost than you would if you received a business acquisition loan for the whole purchase price. Seller financing is common for small business transactions, but you should determine early on in the process whether or not it’s available from the seller.
3. Hire a Business Broker
When you’re a buyer, a broker can help you find the right business. Think of it as a real estate agent helping you look for the right home. The difference is that you may not have to pay the broker anything if you buy a business they’re selling. Business brokers typically aren’t paid on both sides of the transaction, and usually they’re compensated by the seller. Business brokers can also access many more business opportunities than you can by yourself due to their experience and extensive network.
Bottom Line: Business Valuation Calculator
The most important thing in a business acquisition, whether you’re a buyer or a seller, is to arrive at a fair price for the business. Our business valuation calculator is a good starting point for getting estimated value. It will give you a thumb in the air of what your business might be worth.