How Much Is Your Business Actually Worth? (2024)

FAQs

How Much Is Your Business Actually Worth? ›

Take your total assets and subtract your total liabilities. This approach makes it easy to trace to the valuation because it's coming directly from your accounting/record keeping.

Add up the value of everything the business owns, including all equipment and inventory. Subtract any debts or liabilities. The value of the business's balance sheet is at least a starting point for determining the business's worth.

Use Revenue or Earnings as Your Guide

For example, if the industry standard is "three times sales" and your revenue for last year was $500,000, your revenue-based valuation would be $1.5 million. Multiplying your earnings, or how much your business makes after subtracting its costs, is another valuation method.

The Revenue Multiple (times revenue) Method

A venture that earns $1 million per year in revenue, for example, could have a multiple of 2 or 3 applied to it, resulting in a $2 or $3 million valuation. Another business might earn just $500,000 per year and earn a multiple of 0.5, yielding a valuation of $250,000.

The Net Book Value (NBV) of your business is calculated by deducting the costs of your business liabilities, including debt and outstanding credit, from the total value of your tangible and intangible assets.

Business Value Based on Sales

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.

The FME used in the valuation can be based on net profit after tax or alternatives to this such as EBIT or EBITDA. EBIT multiples can range from 0.8 times FME to over 5 times, depending upon the industry, performance, and relative risk of the subject business.

In essence, if the annual cash flow is $200,000, the selling price will likely be between $400,000 and $600,000. The first step to finding out what your business will sell for is determining its market value. There are several methods for determining the market value of your business.

The million-dollar mark is a tipping point at which the number of buyers interested in acquiring your business goes up dramatically. The more interested buyers you have, the better multiple of earnings you will command.

In general, the average revenue is around $44,000 per year for a company with a single owner/employee. Two-thirds of these small businesses make less than $25,000 per year. Most of these businesses are based out of the home.

Is $100 million in revenue good? ›

However, a revenue of $100 million per year is a significant amount, and it suggests that the company has established a solid customer base and is generating significant income. Based on this information, it's possible that the company could have a valuation in the hundreds of millions of dollars, or even higher.

Price earnings ratio

The price earnings ratio (P/E ratio) is the value of a business divided by its profits after tax. You can value a business by multiplying its profits by an appropriate P/E ratio (see below).

90% of American businesses generate less than $3m in annual revenue, so we'll start there. Companies with under $3m in sales will typically sell for 2.5 – 3.5 X their discretionary earnings (total cash the owner could take out of the company).

Market-based business valuations calculate your business's value by comparing it to similar businesses that have previously sold. This method applies well to a business with no assets, but comes with the challenge of identifying sufficiently comparable competitors (who would presumably also have no assets.)

A common way to value a private company is by using the Discounted Cash Flow (DCF) or a Comparable Company Analysis (CCA), and by taking into account factors such as financial performance, growth prospects, industry dynamics, and risk factors.

A business will likely sell for two to four times seller's discretionary earnings (SDE)range –the majority selling within the 2 to 3 range. In essence, if the annual cash flow is $200,000, the selling price will likely be between $400,000 and $600,000.

Factors affecting small business valuation

Thus, buyers have to approach the deal as if they are purchasing a job. Businesses where the owner is actively-involved typically sell for 2-3 times the annual earnings of the company. A business that earns $100,000 per year should sell for $200,000-$300,000.

If a company is asking for $50,000 for 5% equity they are valuing themselves at $1,000,000.