What We'll Cover
- Knowing the value of your business comes in handy when you’re ready to sell your business, looking to attract investors or secure financing, planning insurance coverage and more.
- You can calculate the value of your business using the EBITDA multiplier method.
- Business valuation services can help cover pieces you might not feel apt to do, like market research.
Whether you're considering selling your business, seeking investment, or just curious about the financial health of your enterprise, all business owners at some point will wonder: “How much is my business worth?”
And likely follow that question with: “How do I figure out how much my business is worth?”
Here we’ll show you the process of determining your business’s value, so you can better understand how much your business is worth and make informed decisions.
What You’ll Need to Calculate the Value of Your Business
While calculating the value of your business may be a simple formula, you’ll need some things ready to make those formula inputs. Get these items together as you work to determine the value of your business.
Financial records
- Income statements: These provide a detailed view of your revenue, expenses, and profitability over a specific period.
- Balance sheets: Balance sheets outline your assets, liabilities, and equity, offering insights into your company's financial health.
- Cash flow statements: These documents track the flow of cash in and out of your business, highlighting your ability to generate cash.
Details about tangible and intangible assets
- Tangible assets: physical items such as equipment, real estate, and inventory.
- Intangible assets: intellectual property, patents, trademarks, copyrights, and goodwill.
Understanding of market conditions
Stay informed about your industry's current market conditions, including growth trends, competition, and economic factors that could impact your business's value.
Understand the value of your competitive advantage
Identify what sets your business apart from competitors. This might include a strong customer base, proprietary technology, a loyal workforce, or a unique product/service.
Having this market understanding will help you identify the industry multiple, which you’ll learn more about below, but you can also use a business valuation service to determine that number if you’re unsure.
How Much is My Business Worth? Your Business Valuation Calculator
Now that you have all of your company’s info that you need, it's time to calculate the value of your business. While there are plenty of methods to choose from to determine a business's worth, one of the most used formulas is the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) multiplier method:
What is EBITDA?
This is your business's earnings before accounting for interest, taxes, depreciation, and amortization. It provides a clear picture of your operational profitability.
The EBITDA Multiplier Method
EBITDA
$
Industry Multiple
Business Value
$
Industry Multiple: This is a multiplier specific to your industry. It varies depending on factors like market demand, industry growth, and risk levels. You can find industry multiples by researching comparable business sales in your sector.
To calculate the industry multiple for your business, examine recent sales of similar companies in your industry. Industry-specific reports, often available from industry associations or market research firms, can give you insights into industry multiples. These reports may include data on recent sales and valuation trends within the industry. The industry multiple can fluctuate, so it helps to stay up to date with market trends.
Multiply your EBITDA by the industry multiple, and you'll have an approximate value for your business. Keep in mind that this is a simplified calculation, and other factors may come into play, especially for businesses with unique characteristics.
Business Valuation Example
Here’s an example to illustrate how to use the EBITDA multiplier method to estimate the value of your business.
Imagine you own a small manufacturing company that produces custom-made furniture. Your financial records show the following:
| EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): | $200,000 |
|---|---|
| Industry Multiple for Furniture Manufacturing: | 4.5 |
To calculate the approximate value of your business using the EBITDA multiplier method, follow the formula:
EBITDA
$200,000
Industry Multiple
4.5
Business Value
$900,000
Your business is estimated to be worth approximately $900,000 based on the EBITDA multiplier method and the industry multiple for furniture manufacturing.
It's important to note that this is a simplified calculation. The actual value of your business may vary depending on several factors not accounted for in this basic calculation, such as the condition of your equipment, the strength of your customer relationships, and the state of the broader economy.
To get a more accurate valuation, especially for complex businesses, you may want to consult with a professional business appraiser who can consider all relevant factors and provide a comprehensive valuation report tailored to your circumstances.
Related content:
Working With Business Valuation Services
While the EBITDA multiplier method can give you a great starting point, the valuation process can be complex for larger or more intricate businesses. Here’s why you might consider using a business valuation service:
- Accuracy: Valuation experts have the knowledge and experience to consider all relevant factors, providing a more accurate estimate of your business's value.
- Credibility: Having a valuation conducted by a reputable third party adds credibility to your business's worth, which can be crucial when seeking investment or selling your company.
- Legal compliance: Valuation professionals adhere to industry standards and legal requirements, ensuring that your valuation is conducted correctly and ethically.
- Customization: Valuation experts can tailor their approach to your business's unique characteristics, accounting for intangible assets, market conditions, and competitive advantages effectively.
Get your FREE Business Valuation at OneAZ
OneAZ Business members can take advantage of our free business valuation offer.
Key Takeaways
- Knowing the value of your business comes in handy when you’re ready to sell your business, looking to attract investors or secure financing, planning insurance coverage and more.
- You can calculate the value of your business using the EBITDA multiplier method.
- Business valuation services can help cover pieces you might not feel apt to do, like market research.
Determining the value of your business is an important step for helping you make informed decisions about the future of your business. By collecting the necessary financial data, understanding market conditions, and considering your competitive advantage, you can estimate your business's worth using the EBITDA multiplier method.
For more complex businesses or for added assurance, enlisting the services of a professional valuation expert is a wise choice. Ultimately, knowing the value of your business empowers you to make strategic decisions that can positively impact its future success.
APR = Annual Percentage Rate
