If you’re the owner of a successful business, it’s likely your business has accumulated in value to the point where it’s worth a significant sum. As a private company, however, you have no real time visibility into what that figure is.
If you owned stock in a publicly traded company, you could track its value, down to the closest cent at any time. But for people who own stock in a private company, whether it’s the founders, investors, or employees, it’s difficult to accurately estimate the value of their equity.
A significant portion of your personal wealth is likely tied up in your business. If you’ve been successful, the value of your equity may outstrip the value of your home or your retirement accounts. So, whether you’re planning for retirement, refining your estate planning, or considering selling your business, it can be extremely helpful to understand what your business might be worth.
The field of business valuation is a complex one. A quick back-of-the-envelope calculation of your business’s value can be helpful, but you shouldn’t rely on it too heavily. You can likely perform these calculations by yourself or with the assistance of someone from your business’s finance department.
Use the value directionally. These quick calculations are often based on approximations and rely on a series of estimates, which may or may not be accurate. Done right, they’ll give you a ballpark figure of what your business is worth, but it won’t be the rigorous, data-backed approach that certain scenarios demand.
For that, you’d need to partner closely with a business valuation expert. These business valuation firms offer a range of different types of business valuation reports with varying degrees of rigor. They include:
If you choose to work with a business valuation service to determine the value of your business, your choice of report will be driven by the reason you need a business valuation in the first place.
If you’re just curious, a calculation of value might be enough. If you need the valuation analyst to perform all the procedures required for a conclusion of value, but do not need a Detailed Valuation Report, a Summary Valuation Report is more appropriate. And if you need a detailed and comprehensive report to rely on for tax compliance, a Detailed Valuation report is necessary.
Each of these valuation options are an estimate. Ultimately, your business is worth whatever a buyer is willing to pay.
If you’d just like to quickly gauge the value of your business, it is possible to do so without seeking professional assistance. However, these internal valuations should only ever be used for informational purposes. If you need a valuation for any other reason, contact a business valuation professional.
Calculating your business’s book value provides you with a quick, easy way to determine what your business would be worth if you had to liquidate it today.
To calculate book value, simply subtract your business’s liabilities from the estimated value of its assets. This is an extremely simple valuation method that does not account for any goodwill or other intangible value accrued within your business.
Multiplying the revenue of your business by a certain multiple can also be a quick, helpful way to roughly estimate its value. Make sure to use a multiple that accurately reflects what other businesses have sold for in your industry.
There are various sources for obtaining a revenue multiplier by industry, such as BizBuySell, a business buying marketplace, and the Business Reference Guide. For example, if you owned a business with $1 million in annual revenues, and determined that a revenue multiple of .5 is appropriate, then this would suggest a value of $500,000 for your business.
Again, this is a simple valuation method that does not take into account the unique characteristics of your business or your local market. If you owned the only plumbing business in a town with a fast-growing population, your business would likely be more valuable than a plumbing business in a town with a declining population and three other concrete firms.
“Revenue is vanity, but profit is sanity,” as the popular saying goes. It is often more appropriate to value your business based on its profitability instead of its revenue. After all, the goal of owning a business is to make a profit – not just drive revenue at the expense of making money.
An earnings multiplier, sometimes called an EBITDA multiplier, works the same as a revenue multiplier, except it multiplies your business’s profits to estimate its value.
Consider our business from the example above. After deducting all of their expenses, let’s say the firm has earnings of $200,000, or a 20% profit margin. Using the industry average EBITDA multiple of 4, the business would have an estimated value of $800,000 – nearly $300,000 more than the value using the revenue multiplier method. This illustrates why it is important to take profitability into consideration and not just revenue.
This method is a good fit for established businesses with stable cash flows that are expected to continue in years to come. To calculate the value of your business, forecast your cash flows for future years and then apply a capitalization rate to these. The advantage to applying this method is that it provides a more tailored approach to your specific business than applying industry average multiples. However, it requires more expertise in determining an appropriate cash flow measure and capitalization rate.
You can do this with a simple Excel formula or by using an online Net Present Value (NPV) calculator. If you’re not sure what your business’s cash flows will look like, or don’t understand how to determine and apply an appropriate capitalization rate, a business valuation specialist will be able to provide guidance to you.
These basic business valuation techniques using industry rules-of-thumb metrics provide entrepreneurs with a directional understanding of what their business is worth, but they’re no substitute for the rigorous analysis conducted by a business valuation firm.
At HoganTaylor, our business valuation professionals have a proven track record of advising businesses in Oklahoma, Arkansas, and beyond. Our team takes a systematic approach that leverages all business valuation best practices to deliver data-backed reports that stand up to legal scrutiny. With experience in a range of industries and a team of accredited business valuation professionals, HoganTaylor can help with all your business valuation needs.
Take the first step to accurately valuing your business by contacting a HoganTaylor advisor today.
If you have any questions about this content, or if you would like more information about HoganTaylor’s Forensic, Valuation & Litigation Support practice, please contact Clay Glasgow, CPA, ABV, CFF, CFE , Advisory Partner.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.