How much is your small business worth? Finding out may be easier than you realize. Just use one of the following methods of small business valuation: asset value plus, EBITDA multiple method, and revenue multiple method.
There are a lot of good reasons for knowing how much your business is worth. Maybe you’re buying out a partner, applying for a loan or grant program, or issuing equity. It’s also good to know so you can set a baseline and track your business’s change in value.
Knowledge is power whenever you enter negotiations or an agreement. For your business, that means knowing what your business is worth. Approaching negotiations knowing your business’s value will work in your favor.
In a recent Entrepreneurs Forever Deep Dive, I explained each business valuation model in detail, including how to calculate and various use cases to make them easier to understand. You can watch the presentation by pressing the play button on the video.
Or to get a quick overview, I'm including a brief summary here:
Add up your tangible, physical assets (ex: equipment) based on how much you could sell them for today. Then add the value of your intangible assets, like your website, customer list, reputation, how long you've been in the market, what your brand stands for, etc., the work that's already in production, and the quality of your employees. The sum is your business’s value.
tangible assets: $100,000 + intangible assets: $200,000 = $300,000 Business value
Start by calculating your average EBITDA. Then use a multiplier — usually between 1x to 20x – based on what’s appropriate for your industry. The product is your value. Most businesses will be valued using between a 3x and 6x multiple. In the example below, we use 4x as the multiplier.
BTW, don't let EBITDA scare you. It simply means “earnings before interest, taxes, depreciation and amortization.” All of the information you need to calculate your EBITDA appears at the end of your P&L – your profit and loss statement.
EBITDA (2-year average): $125,000 x 4 = $500,000 business value
The revenue multiple model is the least common valuation model listed here and is used primarily when profitability hasn’t yet been achieved but IS expected (think tech startup). When a company sells for $60 million without yet showing profit, know that they were valued using this model.
To calculate, use top-line revenue from your P&L. Then use a multiplier like you did in the EBITDA model. One caveat: these multipliers are much smaller. Some may go as high as 3.5x, most are lower. We use 1.5x in our example.
revenue: $220,000 x 1.5 = $300,000 business value
Learn more and see specific calculations for the three small business valuation models in this Deep Dive the video. AJ Drexler, CEO of Entrepreneurs Forever and a small business owner, provides details about each model, including information about how and when to use them, why it’s essential to know your business’s value, and even how to calculate your small businesses’s EBITDA.
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