What is the rule of thumb for valuing a business?
The most commonly used rule of thumb is simply a percentage of the annual sales, or better yet, the last 12 months of sales/revenues.
Typically, valuing of business is determined by one-times sales, within a given range, and two times the sales revenue. What this means is that the valuing of the company can be between $1 million and $2 million, which depends on the selected multiple.
Value (selling price) = (net annual profit/ROI) x 100
Say you wanted a ROI of at least 50% for the sale of your business. If your business' net profit for the past year was $100,000, you could work out the minimum selling price you should set.
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.
When valuing a company as a going concern, there are three main valuation methods used by industry practitioners: (1) DCF analysis, (2) comparable company analysis, and (3) precedent transactions.
- Book Value. One of the most straightforward methods of valuing a company is to calculate its book value using information from its balance sheet. ...
- Discounted Cash Flows. ...
- Market Capitalization. ...
- Enterprise Value. ...
- EBITDA. ...
- Present Value of a Growing Perpetuity Formula.
Most companies sell for 2-6 times SDE. If you look at all business sales under $1 million for the last 10 years, the average multiple of SDE is 2.2 times but sometimes the multiple is not as high as the seller wants or thinks it should be.
Because the process for determining the value of a small business is complicated, you might want to consider consulting a professional business broker or accountant that specializes in valuation, rather than going it alone. However, you're fully capable of valuing your business using your own resources.
Multiply the Revenue
As with cash flow, revenue gives you a measure of how much money the business will bring in. The times revenue method uses that for the valuation of the company. Take current annual revenues, multiply them by a figure such as 0.5 or 1.3, and you have the company's value.
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. This is consistent with most listings on BizBuySell, a small business brokering site with thousands of companies available for sale.
What is a good price to sales ratio?
In general, a good price-to-sales ratio (P/S ratio) is one above the P/S ratio of the S&P 500. A company with a P/S ratio higher than that of the S&P 500 is able to show that investors are willing to pay a higher premium for the company's revenues than for the revenues of the stock market as a whole.
Most companies sell for 2-6 times SDE. If you look at all business sales under $1 million for the last 10 years, the average multiple of SDE is 2.2 times but sometimes the multiple is not as high as the seller wants or thinks it should be.
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).
Multiply the Revenue
As with cash flow, revenue gives you a measure of how much money the business will bring in. The times revenue method uses that for the valuation of the company. Take current annual revenues, multiply them by a figure such as 0.5 or 1.3, and you have the company's value.
