A business valuation calculator helps buyers and sellers determine a rough estimate of a business’s value. Two of the most common business valuation formulas begin with either annual sales or annual profits (also known as seller discretionary earnings), multiplied by an industry multiple. Both methods are great starting points to accurately value your business.
For a more in-depth analysis, which can help maximize your payout when selling your business, consider working with a business valuation provider like Guidant. For $495, a dedicated valuation specialist at Guidant will provide a detailed business valuation, financing assessment, and in-depth industry report.
Factors That Go Into A Business Valuation
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
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 offer a free business valuation to business owners that are ready to sell their business, especially those businesses with net cash flow above $100,000. These valuations will take significantly more information into account than most business valuation calculators, increasing their accuracy.
Tangible Assets vs Intangible Assets
While not included in our business valuation calculator, tangible and intangible assets are both critical pieces of the business valuation puzzle. Tangible assets such as commercial real estate, equipment, and inventory all have the potential to increase the value of a business; and businesses that lack these tangible assets may have a lower value compared to counterparts.
Some intangible assets are difficult to put a price tag on, but they should be valued. A business broker or mergers and acquisitions (M&A) expert with deal-making experience can help determine the value of these assets. An accurate valuation will help you set a price for your business as well as play a significant role in the type of financing options a potential buyer may have.
How To Use The Business Valuation Calculator
If you’re buying a business, this business valuation calculator is designed to tell you whether you can afford to purchase the business and whether the business is worth its asking price. If you’re a seller, the calculator is a reality check. Essentially it gives you an estimation of the 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 and 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 calculations are complete, and display the potential value of the business. 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.
Business Valuation Calculator Formula
There are many ways to value a business, and which method is most reliable will depend on the annual revenue of the business as well as how much data is available, among other factors. In addition to multiples of annual sales and annual profits, which we’ve included in our calculator, business owners may wish to consider other methods such as market-based and asset-based valuation approaches.
Annual Sales Multiple Formula
Business Valuation = Annual sales x industry multiple
Seller’s Discretionary Earnings (SDE) Multiple Formula
SDE Valuation = (Annual profits + owner’s salary) x industry multiple
When to Consider Using a Business Valuation Expert
A business valuation expert can help sellers obtain the best price for their business while also ensuring that the sales price is based on strong data. The case for using a business valuation expert depends on a number of different factors, including the size of the business, the complexity of its operations, and the industry and market factors that influence its growth.
Why Use a Pro
“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 Business Exits
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.
Our top three tips to help you maximize the value of your business are:
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 fewer 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.
The documents business owners should have ready are:
- 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.
Choosing the best business broker for your situation also takes away many of the headaches 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 at a maximum price.
3 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. Many buyers start out with no clear understanding of the type of business they would like to own, and wind up doing research on the fly. Buyers should research industries that they are interested in to determine future potential, while avoiding contracting markets.
The three tips to keep in mind as you look for the right business to purchase are:
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 its 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
Hiring a business broker is not quite like hiring a real estate agent. Brokers are compensated by the seller, and may not have an incentive to work with buyers directly, preferring instead to let buyers choose the listings they’re interested in. This doesn’t mean brokers will not work with buyers, but rather that they may not be well suited to show the buyer listings that make sense, as they typically list only a small handful of businesses.
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. Some brokers may charge an upfront fee for assisting buyers, and in return provide valuation and negotiation services in addition to help finding the right business.
Pros and Cons of Using a Business Valuation Calculator
Using a business valuation calculator is a fast and simple way to get a ballpark value of a business without hiring an expert and with minimal effort; however, it’s not without its disadvantages. Our business valuation calculator doesn’t factor in tangible and intangible assets which can both significantly impact a business’s actual value.
Some of the pros of using a business valuation calculator are:
- Quick and simple: A business valuation calculator can be used as a quick and easy tool to ballpark a business’s value, which can be especially useful when comparing many like businesses to each other.
- Valuation varies by industry: Most business valuation calculators include an average industry multiple in the calculation, which is useful as not all industries have the same risks and opportunities, which can significantly impact a business’s value.
- Based on revenue and profits: By focusing on actual revenues and profits generated by a business, our valuation calculator is based on a business’s bottom line, which is how much money a business generates notwithstanding assets and liabilities.
Some of the cons of using a business valuation calculator are:
- Doesn’t include assets: Our valuation calculator excludes tangible and intangible assets, which can make up a significant portion of the actual value of a business in asset-heavy industries. It should be combined with a valuation method that includes assets.
- Not a market-based approach: For some businesses, bullish market trends may indicate a much stronger valuation. Conversely, for businesses operating in a contracting market, this approach may overinflate the value of the business’s future revenues.
- Excludes expert analysis: The biggest flaw in any math-based valuation method is the absence of expert analysis. No two businesses are exactly alike, and a math-based calculation ignores factors like intangible assets and year-over-year growth.
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. This involves several factors not taken into account by a business valuation calculator, however, it can serve as a good starting point. From there you will want to choose a detailed valuation method and determine whether to hire an expert or perform the valuation yourself.