How Much Is Your Business Worth?
Whether you're considering selling your business, looking to attract investors, or transferring the company to the next generation, you need to know what it's worth. Business valuation isn't just about looking at your balance sheet or sales figures; it’s a mix of financial analysis, market conditions, and risk assessment.
There are several business valuation methods, and each has strengths and ideal use cases. In this guide, we’ll walk through the three common valuation approaches for small businesses to give you an idea of which approach may work best for you.
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1. Asset-Based Valuation
The asset-based business valuation method calculates business worth by tallying up asset value (including tangible and intangible assets) and subtracting liabilities. This approach is commonly used for asset-heavy businesses like manufacturers and real estate companies or companies being liquidated. Because it ignores future earnings potential, it's usually not suitable for service-based companies with minimal physical assets.
For example, say a manufacturing company has $5 million in assets and $2 million in liabilities. Its asset-based valuation would be $3 million.
2. Discounted Cash Flow (DCF) Valuation (Income-Based Approach)
The discounted cash flow method estimates business value based on projected future cash flows, discounted back to present value. This method is particularly useful for businesses with strong earnings potential and long-term growth prospects.
To calculate your business's discounted cash flow, you need a few crucial pieces of information:
Your cash flow
The discount rate you'll apply to future cash flow (some companies use the federal funds rate)
The number of years you want to include in the calculation (typically 5-10 years)
Once you have that information, the discounted cash flow formula is:
DCF= CF/(1+r)n
Where:
CF = Cash flow for the given year
r= discount rate
n = number of years in the future
The DCF method is easy to calculate, so you don't need to involve a professional to get an idea of your business's market value. However, the downside is that it relies on several assumptions and estimates. Overestimating your cash flow or using the wrong discount rate gives you a skewed business valuation.
3. EBITDA Multiple Valuation
The EBITDA multiple method values a business based on Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). It’s one of the most commonly used valuation methods for mergers and acquisitions.
The formula for calculating your EBITDA multiple is:
EBITDA Multiple = Enterprise Value / EBITDA
Where:
Enterprise Value = (market capitalization + value of debt + minority interest + preferred shares) - (cash and cash equivalents)
EBITDA = earnings before tax + interest + depreciation + amortization
Once you have your EBITDA multiple, you can compare it to those of similar companies. Here are the typical EBITDA multiples for several industries:
Construction: 11.89
Ground Freight and Logistics: 13.29
Business Support Services: 8.35
Healthcare Facilities and Services: 16.41
Financial Service Providers: 16.49
The EBITDA multiple business valuation method better represents business value because it includes both debt and equity.
Which Valuation Method Is Best for Your Business?
The right valuation method depends on your business type, industry, and reason for getting a business valuation.
Selling your business? The EBITDA method can help you set a fair price that reflects the business's value without undervaluing the company or setting an unrealistically high price that deters potential buyers.
Securing investors? DCF valuation highlights future growth potential. It can also give you an idea of how much equity you'll need to give up in exchange for investment.
Asset-heavy business? The asset-based approach makes the most sense.
No single method is perfect, so many valuations combine these approaches to get a well-rounded estimate.
If you just want an idea of what your business is worth for establishing partner ownership, a less rigorous business valuation method might suffice. However, if you need a company valuation to determine the tax impact of transferring ownership or issuing stock options to employees, you may need to go through a formal business valuation process with an accredited appraiser.
Know the True Value of Your Business
Understanding your business’s value isn’t just about preparing for a sale—it’s about making informed decisions, securing funding, and succession planning.
If you need help determining your business value or gathering the data necessary for an objective valuation, schedule a call with Slate. We can walk you through the different valuation methods and identify risks and industry trends that might impact business value.