Estimate the fair market value of your company using the earnings multiplier method.
Estimated Total Business Value
$0.00
function calculateBusinessValue() {
var earnings = parseFloat(document.getElementById('val-earnings').value);
var multiplier = parseFloat(document.getElementById('val-multiplier').value);
var inventory = parseFloat(document.getElementById('val-inventory').value) || 0;
var assets = parseFloat(document.getElementById('val-assets').value) || 0;
if (isNaN(earnings) || isNaN(multiplier)) {
alert("Please enter both the Annual Net Profit and the Industry Multiplier.");
return;
}
var goodwillValue = earnings * multiplier;
var totalValue = goodwillValue + inventory + assets;
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
maximumFractionDigits: 0
});
document.getElementById('val-result-display').innerHTML = formatter.format(totalValue);
document.getElementById('val-breakdown-text').innerHTML =
"Breakdown: " + formatter.format(goodwillValue) + " (Earnings Value) + " +
formatter.format(inventory) + " (Inventory) + " +
formatter.format(assets) + " (Assets).";
document.getElementById('val-result-container').style.display = 'block';
}
How to Calculate the Value of a Business: A Comprehensive Guide
Determining the worth of a business is both an art and a science. Whether you are looking to sell your company, seek investment, or simply understand your financial position, a proper valuation is essential. Most small to medium-sized businesses are valued using the Earnings Multiplier Method, which focuses on the company's ability to generate cash flow.
Common Valuation Methods
While several frameworks exist, these three are the most prevalent in the current market:
Seller's Discretionary Earnings (SDE): Typically used for small owner-operated businesses. It adds back the owner's salary and perks to the net profit.
EBITDA: Used for larger companies. It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
Asset-Based Valuation: Calculates the value of the business based on the sum of its tangible assets (equipment, inventory, real estate) minus liabilities.
Understanding the Multiplier
The multiplier is a coefficient used to reflect the risk and growth potential of an industry. A "3x" multiplier means the business is worth three times its annual profit. High-growth sectors like SaaS (Software as a Service) often see multipliers of 6x to 10x, while service-based retail or restaurants typically range between 1.5x and 3x.
Key Factors That Influence Your Business Value
Beyond the raw numbers, several qualitative factors can push your multiplier up or down:
Owner Dependency: If the business cannot run without you, its value decreases significantly.
Revenue Concentration: Having one client represent 50% of your revenue is a high risk that lowers valuation.
Market Trends: Is your industry growing or shrinking?
Systems and Documentation: Well-documented Standard Operating Procedures (SOPs) make a business more attractive to buyers.
Step-by-Step Example Calculation
Let's look at a realistic scenario for a local manufacturing shop:
Annual Net Profit: $200,000
Industry Multiplier: 2.5 (determined by market research)
Tangible Assets: $100,000 (Machinery and trucks)
Inventory: $50,000 (Raw materials)
The Math: ($200,000 × 2.5) + $100,000 + $50,000 = $650,000 Total Value.
Conclusion
While our calculator provides a solid estimate based on industry standards, remember that a business is ultimately worth what a buyer is willing to pay. For official purposes, such as tax filings or legal disputes, always consult with a certified business appraiser or a specialized business broker.