When Selling a Business, How Do You Value It?

January 4, 2023 Uncategorized

When selling a business, how do you value it? Is it strictly based on assets and revenue? Or is there something else involved?

When Selling a Business, How Do You Value It?
When Selling a Business, How Do You Value It?

You might be selling your business because you’re retiring, relocating, or just ready for a change. Whatever the reason, if you’ve decided to sell, one of the first questions you’ll need to answer is how to value your business.

Determining the value of a business is both an art and a science, and there are several methods you can use. But what if you’re in a hurry to sell, or you don’t have the time or resources to do a full evaluation?

Here are three quick and easy methods to help you value your business:

How to Value a Business Quickly

  1. The rule of thumb method.

This is probably the simplest way to value a business. The rule of thumb method uses industry averages to come up with a rough estimate of your business’s worth.

To use this method, you’ll need to know the average sales price for businesses in your industry and calculate a multiple of that number based on your business’s profitability.

For example, if the average sales price for businesses in your industry is 1.5 times annual revenue, and your business generates $500,000, you would multiply 1.5 by $500,000 to get a value of $750,000.

  1. The earnings method.

This method values your business based on its profitability. To use this method, you’ll need to calculate your business’s EBITDA (earnings before interest, taxes, depreciation, and amortization). Once you have your EBITDA number, you’ll multiply it by a multiple specific to your industry.

For example, if the average multiple for businesses in your industry is 4, and your business has an EBITDA of $200,000, you would multiply 4 by $200,000 to get a value of $800,000.

  1. The market comparable method.

This method values your business based on recent sales of similar businesses in your industry. To use this method, you’ll need to find data on recent sales of businesses similar to yours in terms of size, location, and type of business. Once you have this information, you can calculate the average sales price and use that as an estimate of your business’s value.

Business Valuation Formula

Once you’ve selected a method, you’ll need to choose a valuation formula. The three most common formulas are the market value formula, the book value formula, and the earnings multiple formula.

Market Value Formula

The market value formula values your business based on the current market price of its assets. To use this formula, you’ll need to add up the market value of your business’s assets and subtract the market value of all of its liabilities. The result is the market value of your business.

Book Value Formula

The book value formula values your business based on the historical cost of its assets. To use this formula, you’ll need to add the historical cost of all your business’s assets and subtract all of its liabilities. The result is the book value of your business.

Earnings Multiple Formula

The earnings multiple formulae values your business based on its profitability. To use this formula, you’ll need to calculate your business’s EBITDA and multiply it by a multiple specific to your industry. The result is the value of your business.

How to Value a Business with No Assets

If your business has no assets, you’ll need to use the earnings or market-comparable methods to value your business. To use the earnings method, you’ll need to calculate your business’s EBITDA and multiply it by a multiple specific to your industry.

To use the market comparable method, you’ll need to find data on recent sales of businesses similar to yours in terms of size, location, and type of business. Once you have this information, you can calculate the average sales price and use that as an estimate of your business’s value.

Valuing Business FAQ

How do you calculate the value of a business to sell?

The easiest way to value a business is using the rule of thumb method. This method uses industry averages to come up with a rough estimate of your business.

How much is a business worth with $1 million in sales?

The value of a business with $1 million in sales will depend on the profitability of the business and the industry it’s in. For example, a business operating in FinTech with $1 million in sales will likely be worth more than a retail shop that does $1 million in sales.

How do you value a business based on revenue?

The most common way to value a business based on revenue is using the rule of thumb method. This method uses industry averages to come up with a rough estimate of your business.