Valuation Formula: 10 Most Used Calculations | Quick Biz Valuation
Many different types of valuation formulas can be used to determine the worth of a business. Here are ten of the most common formulas to value a business:
1) Asset-Based Valuation
The valuation formula for an asset-based calculation is:
Current Value = (Asset Value) / (1 – Debt Ratio)
Business owners either overvalue or undervalue their company when they are determining its worth.
To quickly value a business, find its total liabilities and subtract them from the total assets. This will give you an idea of its book value.
This formula estimates the worth of a business by looking at its assets and subtracting any liabilities.
2) Income-Based Valuation
The valuation formula of income-based calculations is:
Present Value = (Annual Income/ 1+ Discount Rate ^ (1/ number of years)
This approach looks at the income of the business and estimates its future value. It then discounts that value back to the present to find the current worth.
If you are considering selling your business in California, the income valuation method is often used by companies that have a stable and predictable income stream.
Such businesses are usually valued at a multiple of their earnings, such as four to six times their annual earnings before interest, taxes, depreciation, and amortization (EBITDA).
3) Market-Based Valuation
The market-based calculation for a business’s current value would be:
CV = (EBITDA x 1.5) – (current liabilities x 0.5)
This formula is best used for service-type companies that provide a service business model.
V = (EBITDA * 1.3) / (Revenue – COGS) | For a trading/retail business valuation
This formula is best used for a trading or retail type of business as inventory is a current asset.
This formula looks at what similar businesses have sold to get an idea of the current market value.
For example, if you own a business that is similar to one that was recently sold for $1 million, then you can assume that your business is worth around the same amount.
4) Discounted Cash Flow Valuation
The discounted cash flow calculation for a business is as follows:
Value = (Future Cash Flow x Discount Rate) / (1 + Discount Rate)^n
Future Cash Flow = the estimated cash flow for the business at some point in the future
Discount Rate = the rate at which you expect to discount future cash flows back to the present
n = the number of years you expect to wait before receiving those cash flows
This approach looks at the estimated future cash flows of the business and discounts them back to the present to find the current worth.
The such calculation looks like an over-simplification but it can give you a quick idea of the potential value of your business.
Especially, if you are looking to put it up for sale, this is a sample of what potential buyers might use as a starting point in their negotiations.
5) Equity Multiplier Valuation
The equity multiplier calculation for a firm is as follows:
Equity multiplier = current value / earnings before interest, taxes, depreciation, and amortization (EBITDA)
This formula looks at how much money stakeholders have put into the company and multiplies it by a certain number to come up with a current value.
To calculate the equity multiplier, simply divide the current value of the business by its EBITDA.
This will give you a number that represents how much equity has been invested in the company.
The higher the number, the more equity has been invested, and vice versa.
This formula is often used by investors to determine whether a company is overvalued or undervalued.
6) Book Value Valuation
The valuation formula for a book value calculation is:
Book Value = (Beginning of Year Assets – End of Year Assets) / (End of Year Liabilities – Beginning of Year Liabilities)
This approach looks at what the company’s assets are worth on paper, based on their historical costs. It does not take into account any appreciation or depreciation that may have occurred since then.
This is how to calculate the book value of a business:
To calculate the book value, simply subtract the liabilities from the assets. This will give you equity on the balance sheet.
Next, divide this number by the number of shares outstanding to get the book value per share.
If you are planning to exit your business, this formula is often used by buyers to lowball you on price.
To avoid this, be sure to have a good understanding of the market value of your business before entering into any discussions.
7) Liquidation Value:
The liquidation value calculation is as follows:
Liquidation value = Current liabilities – Value of assets
This is the amount that would be received if the company was forced to sell all its assets immediately. It does not take into account any outstanding liabilities.
No business owner wishes to liquidate the business but it’s a method that can be used to calculate the value of a company.
To avoid using this valuation method, keep your business running smoothly and try to avoid any financial difficulties.
8) Break-Up Value
The break-up value calculation formula is:
(Asset Value + Liability Value) – (Total Debt) = Business Value
The break-up value calculation is a more comprehensive valuation that accounts for the value of a business if it were to be sold in pieces.
This calculation is used when a business is considering a sale, but the owner wants to ensure they get the best possible price for each asset.
The formula takes into account the value of the assets and liabilities of the business and then assigns a value to each component.
This is the amount that would be received if the company were broken up and sold off in pieces. Again, it does not take into account any outstanding liabilities.
Such as in the case of a sale, this valuation method can also be used when a business is considering a merger or acquisition.
This scenario will show you how to calculate the break-up value of a business:
For this example, we will assume that the business has assets valued at $1 million and liabilities valued at $500,000. The total debt of the business is $250,000.
To calculate the break-up value, simply subtract the total debt from the sum of the assets and liabilities. This will give you the value of the business.
In this example, the break-up value would be $1.25 million.
This valuation method is often used by acquirers to ensure they are getting a fair price for their investment.
9) Peer Group Analysis
The formula for a peer group value calculation is:
Value = (1/N) x SUM(Pi*Vi)
N = the number of companies in the group
Pi = the market capitalization of the company i
Vi = the value of company i
This approach compares a company’s financials against those of similar businesses to come up with an estimate of its worth.
A simple walkthrough of this business valuation formula would be as follows:
Say there are 10 companies in the group and company A has a market capitalization of $1 million. Company B has a market capitalization of $2 million, and so on.
To calculate the value of company A, simply take 1/10th of the sum of all the companies’ market capitalizations multiplied by their respective values. In this case, the value of company A would be $100,000.
Who Uses this Valuation Calculation and Why?
This valuation method is used by both investors and analysts to compare companies against their peers.
It’s a useful way to value a company if you want to know how it stacks up against its competitors.
It’s a good way to get an idea of whether a company is overvalued or undervalued relative to its peers.
10) Precedent Transaction Analysis
Precedent transaction value calculation =
(1 + r) ^ (t/2) – C
r = the weighted average cost of capital (WACC)
t = the number of years until the sale
C = the cash flow in the last year of the projection period
This formula looks at recent sales of businesses that are similar to the ones being valued to come up with an estimate of their worth.
Suppose you own a construction company in the HVAC niche and looking to use the precedent transaction value calculation to value your business.
In this case, you would look at the sales of similar businesses in the same industry and region to come up with a valuation for your company.
This valuation method is often used by investment bankers and private equity firms when they are considering an acquisition.
It’s also used by venture capitalists to value startups that are in the same industry as companies they have previously invested in.
This valuation method is a good way to value a company if you have access to data on similar businesses that have been sold recently.
It’s also a good way to value a company if you’re looking at investing in an industry that you’re not familiar with.
5 Best Valuation Formulas to Determine the Value of a Private Company
When valuing a private company, there are a few different formulas that can be used to determine its worth. The most common valuation formulas are the capitalized earnings, the discounted cash flow, the relative valuation formula, the enterprise value to EBITDA multiple, and the asset-based.
Let’s look at each one to find out the best calculation that works for you.
1. Capitalized Earnings Valuation Formula
Capitalized Earnings = net income x (1 + WACC)^5
net income = the company’s last 12 months’ earnings
WACC = weighted average cost of capital
This is how to calculate capitalized earnings.
You take the company’s last 12 months’ earnings and multiply it by (1 + WACC)^5.
The capitalized earnings valuation formula is a good way to value a company if you want to compare it to other companies in the same industry.
It’s also a good way to value a business if you’re looking at investing in a company for the long term.
Selling a business can take a lot of preparation and years to finally get sold. This is an example of a business that is valued at $1m by calculating capitalized earnings.
First, you find the company’s net income. Let’s say it’s $100,000.
Then you find the weighted average cost of capital. For this example, let’s say it’s 10%.
Now you plug those numbers into the formula:
$1m = $100,000 x (1 + 10%)^5
This formula is a good way to value companies that are growing quickly and have a lot of potential for the future.
2. Discounted Cash Flow Valuation Formula
Discounted Cash Flow Value =
Cash Flow / (1 + Discount Rate) ^ Time Period
- Cash Flow = the company’s free cash flow for the next 10 years
- Discount Rate = the weighted average cost of capital
- Period = the number of years in the future
This is how to calculate the discounted cash flow value.
You take the company’s free cash flow for the next 10 years and divide it by (1 + the weighted average cost of capital) ^ the number of years in the future.
The discounted cash flow valuation formula is a good way to value a company if you’re looking at exiting business ownership or a prospective buyer is investing for the long term.
It’s also a good way to value a company if you want to compare it to other companies in the same industry.
This valuation is good for business owners who are looking to sell their company in the next 2 to 5 years.
3. Relative Valuation Formula
The valuation formula for a relative value calculation is:
Value = (Earnings Before Interest and Taxes) / (Interest Expense + Tax Rate)
- EBIT = earnings before interest and taxes
- Interest Expense = the company’s interest expense for the last 12 months
- Tax Rate = the company’s effective tax rate
This formula is a good way to value companies that are in the same industry.
It’s also a good way to value companies that have similar business models.
Let’s say you are a manufacturing business owner looking to value your manufacturing business to maximize its value.
The first step for this example is to find the company’s earnings before interest and taxes (EBIT), which is $1 million.
The next step is to find the company’s interest expense for the last 12 months, which is $100,000.
Now you need to find the company’s effective tax rate, which is 30%.
Now you can plug those numbers into the formula:
$1m = $1 million / (0.3 + $100,000)
4. Enterprise Value to EBITDA Multiple Valuation Formula
The enterprise value to EBITDA multiple value calculations is as follows:
- Enterprise Value = (EBITDA x Multiplier)
- Multiplier = Enterprise Value/EBITDA
- EBITDA = earnings before interest, taxes, depreciation, and amortization
- Enterprise Value = the market value of a company’s equity + debt – cash
If you are in the transportation industry, this calculation can be spot on when it comes to determining the value of your trucking and logistics company.
This is an example of how to use the enterprise value to EBITDA multiple valuation formula.
In this example, we have a company that is valued at $1 million.
The company has an EBITDA of $100,000.
The enterprise value to EBITDA multiple is 10.
So the enterprise value would be $1 million x 10, which equals $10 million.
This valuation is good for business owners who are looking to sell their company in the next 2 to 5 years.
5. Asset-Based Valuation Formula
Asset-based value calculation:
value = assets – liabilities
- Assets = the total value of all the company’s assets
- Liabilities = the total value of all the company’s liabilities
This valuation is good for business owners who want to get a quick and easy value for their company.
If your business is valued at $200k in assets and $50k in liabilities, your business is worth $150k.
There are many different ways to value a company. The key is to use the right method for your specific situation.
If you’re a business owner looking to sell your company, you should use more than one of the valuation methods to determine your company’s worth before putting it up for sale.
If you need help with determining your company’s worth, schedule a free consultation with Andrew Rogerson. He can help you determine the best way to value your company and maximize its value.
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Do you have any questions about how to value a company? Leave a comment below and we’ll be happy to help!
Using the best valuation formula to determine your biggest asset’s worth, as well as the decision to exit business ownership, is a significant life event. There could be plenty of emotions involved.
When you collaborate with a business brokerage firm in California, it will provide all the solutions and insights toward getting the most out of the business sale.
There are only a few ways to sell and value a business quickly in California, and an experienced business broker like Andrew Rogerson can guide you through the best strategy.
It is currently the perfect storm to value and sell your business in California. With the great resignation that started during the pandemic and the trend to continue till 2023, there are no shortages of experienced and well-financed buyers looking for the next opportunity to grab.
With a certified business intermediary at your side, we feel confident that you will sell your business in California quickly and at the highest price.
Andrew Rogerson is a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700 or email him at email@example.com services the whole state of California.
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