Our small business valuation calculator is a tool that helps business owners and entrepreneurs estimate their business's value by considering financial metrics like revenue, profit, and market trends.

Our free business valuation calculator estimates your business's current value using the "Discounted Cash Flow" method.

It simplifies complex valuation methods into an easy-to-use format, making it accessible to those without financial expertise. Recognizing your business's value offers insights to help inform you to:

• Help protect your business's future with key person insurance or Life Insurance for Business Owners.
• Understand how a business transfer works and explore the value of a buy-sell agreement.
• Consider help with retirement plans or offering your employees and yourself convenient access to important life insurance protection.

With accurate insights, business owners can make strategic decisions about selling, merging, expanding, and protecting their business.

Your Calculator Inputs

We only require six inputs:

1. Annual Earnings

Enter the annual earnings before interest, taxes, depreciation, and amortization (EBITDA).

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It's a key measure of a company's profitability and financial performance, focusing on its core operations. It aims to show how much cash a company generates from normal business activities.

The dollar amount that you enter should be company earnings before accounting for any of the following:

• Interest paid on any loans or credit accounts.
• The payment of federal, state, and local taxes.
• Depreciation of business assets over time (e.g., computers, transportation vehicles, machinery, etc.).
• Amortization, the process of gradually writing off the initial expense of a business asset (e.g., the purchase of a retail building, parking lot, or significant piece of equipment).

2. "Excess Compensation" Paid to Owners

Enter a dollar amount for “excessive compensation,” if applicable.

The profitability of a small business often depends on the owners' knowledge, experience, and entrepreneurial skills. A company's attempts to reward an owner for their unique role and efforts may lead the Internal Revenue Service (IRS) to challenge the compensation paid and view it as “excessive compensation.”

Consequently, the IRS can reclassify a portion of the owner's compensation as a dividend, which is not tax deductible by the business, rather than as wages, which are tax deductible.

Learn more about “reasonable compensation” from the Internal Revenue Service (IRS) and The CPA Journal.

3. Anticipated Rate of Earnings Growth

At what percentage rate do you expect or project your business earnings to grow?

Enter a percentage from 0% (earnings will remain level) to 100% (earnings will double).

4. # of Years Earnings Expected to Continue

For how many years do you anticipate your business will continue generating earnings?

Enter the number of years between 0 and 10.

By entering the maximum of 10, you assume that a cash flow of earnings will continue into perpetuity (indefinitely long duration).

5. Level of Risk

Where does your business fall on the risk scale (business/industry/financial)?

Typically, restaurants and retail (e.g., a clothing store) are considered lower risk than manufacturing (e.g., an automobile factory) and high-tech (e.g., a business application software developer).

Select the level of risk that determines the calculated discount rate for this valuation method:

6. Discount for Lack of Marketability

Does your business lack marketability (perhaps due to its small size) or exhibit strong marketability (from long-standing brand recognition, for instance)?

Enter a percentage from -100% to 100%.

A positive discount percentage (between 0% and 100%) indicates some lack of marketability, while a negative discount percentage (between -100% and 0%) indicates more favorable marketability.

Example: If the present value of your current business earnings/excess compensation amounts to $500,000 and you select a discount for lack of marketability of 10%, $50,000 (10% x $500,000) will be subtracted, resulting in an estimated business value of $450,000.

Understanding Your Results

Our Business Valuation Calculator analysis projects the Estimated Business Value based on your inputs and a specific Discount Rate determined by the level of risk you selected.

The estimated value is based on assumptions about future profitability, growth, and other financial metrics. It projects future income and adjusts it to present value to reflect investment risk and opportunity cost.

Steps To Interpret Your Results

To interpret the results of your business valuation effectively, you can follow these steps:

1. Understand the Discount Rate

• Make sure you understand the discount rate. Compare the rate to industry standards. If the rate is significantly higher or lower than typical rates for your industry, consider the factors influencing this choice, such as business risk, market trends, annual growth, or financial stability.

2. Evaluate the Business Value in Context

• Note the estimated business value, which represents the current value of your business based on future earnings potential. Compare this value to similar businesses in your industry. Does the valuation align with your competitors?

3. Review the Assumptions Used

• Verify the assumptions behind these cash flow projections, such as revenue growth rates, operating expenses, and profit margins. Ensure they are realistic and grounded in your business’s historical performance.
• Understand how future growth is accounted for in the valuation. A certain level of growth is assumed, but you should validate whether these growth projections are achievable.

4. Consider Qualitative Factors

• The discount rate is influenced by perceived risk. Consider what risks contribute to the rate, industry volatility, market position, customer concentration, or other potential risks.
• Identify strengths that may enhance your valuation, such as brand reputation, customer loyalty, competitive advantage, or management quality.

5. Run Sensitivity Analysis

• Adjust the discount rate to higher or lower percentages to better understand the valuation. A higher discount rate will decrease the estimated value, indicating higher perceived risk, while a lower discount rate will increase the value, indicating lower risk. This analysis helps assess how sensitive your business value is to changes in risk perception.
• Evaluate different scenarios, such as changes in market conditions, sales growth or costs. This will give you a broader view of your business’s value in various situations.

6. Compare Valuation Methods

• Consider using different valuation methods, such as asset-based, income-based and market-based, to see if the value is consistent across approaches or if discrepancies require investigation.
• If different valuation methods yield different results, reconcile these by averaging them or considering the most appropriate one based on the purpose of your valuation.

7. Seek Professional Guidance

• Consult a certified business appraiser or financial advisor if you're unfamiliar with interpreting valuations. They can help you understand the calculations' nuances and provide insight into how the valuation reflects your business’s reality.

8. Use the Valuation for Strategic Decision-Making

• Use the valuation to make informed business decisions. Whether you plan to expand, sell, or secure funding, understanding your business's value will help you strategize.
• If the valuation is being used to attract investors or potential buyers, prepare supporting documents that show how the valuation was derived and justify why the discount rate is appropriate.

By taking these steps, you can gain a more comprehensive understanding of your business valuation results, validate the underlying assumptions, and use the information to make informed strategic decisions about your company’s future.

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Four Common Business Valuation Methods

Various types of methods exist to arrive at the current estimated value of your business. These methods offer varied perspectives on the business's value, and combining them often provides a comprehensive view. The primary methods are:

1. Asset-Based Valuation

Description: This method determines a business's value based on its net assets. It calculates the value by subtracting liabilities from the business's total assets.

Methods:

• Book Value: Relies on balance sheet values, a straightforward method that may not reflect true fair market asset values.
• Liquidation Value: Estimates asset value for quick sale in a liquidation scenario, often used during business distress.
• Replacement Value: Determines the current cost to replace all assets at market prices.

Pros:

• Relatively simple to calculate.
• Provides a clear picture of the company's net worth.
• Useful for businesses with significant tangible assets.

Cons:

• May not accurately reflect the true market value of assets.
• Doesn't consider intangible assets (e.g., brand reputation, customer loyalty).
• Ignores future earning potential.

Best For: Businesses with significant physical or tangible assets, such as manufacturing or real estate companies.

Example: A manufacturing company owns machinery, equipment, and real estate valued at $5 million. After subtracting liabilities of $1 million, the business's net asset valuation is $4 million.

2. Market-Based Valuation

Description: This method estimates the value of a business by comparing it to similar businesses that have been recently sold.

Methods:

• Market Comparison: Identifies comparable companies (similar size, industry, financial performance, market position) and uses their valuation multiples (e.g., price-to-earnings ratio) to estimate the value of the target company.
• Industry Benchmarks: Uses average valuation multiples or metrics from the industry to assess the business's value.

Pros:

• Based on real market data.
• Relatively easy to understand and apply.
• Provides a good benchmark for comparison.

Cons:

• Finding truly comparable companies can be difficult.
• Market data can be volatile and influenced by external factors.
• May not reflect the unique characteristics of the target company.

Best For: Businesses in industries where market comparables are readily available.

Example: A retail store is valued by comparing it to three similar stores that recently sold for an average price of 1.5 times their annual revenue. If the target store has annual revenue of $2 million, its estimated value would be $3 million.

3. Income-Based Valuation

Description: This method values a business based on its potential to generate future income or cash flow.

Methods:

• Discounted Cash Flow (DCF) Analysis: This method projects future cash flows and discounts them back to their present value using a discount rate that reflects the risk associated with the investment. It is widely used but can be complex and requires making assumptions about future performance.
• Capitalization of Earnings: Estimates the value by dividing the company's expected future earnings by a capitalization rate. This method is more straightforward than DCF but relies on accurate earnings forecasts.

Pros:

• Focuses on the future earning potential of the business.
• Can be tailored to specific business circumstances.
• Widely accepted and used by investors.

Cons:

• Requires making assumptions about future performance, which can be uncertain.
• Can be complex and time-consuming to calculate.
• Sensitive to the discount rate or capitalization rate used.

Best For: Businesses with predictable and stable income streams, making it ideal for businesses with steady cash flows or future growth potential.

Example: A software company projects annual cash flows of $500,000 for the next five years. Using a discount rate of 10%, the present value of these cash flows is calculated to be $1.9 million, representing the estimated value of the business.

4. Earnings Multiplier Valuation

Description: This method values the business by applying a multiple to its earnings, such as EBITDA or net income. The multiplier varies based on industry standards and perceived risk.

Methods:

• Price-to-Earnings (P/E) Ratio: A common multiplier that compares the market price per share to the earnings per share. A higher P/E ratio generally indicates higher growth expectations.
• EBITDA Multiple: Uses EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) as a basis for valuation. This is often used for companies with significant tangible assets.

This McKinsey & Company report, which examines S&P 500 companies, illustrates the variability of multiples within different industry sectors.

Pros:

• Simplest method and easy to understand.
• Widely used in the market.
• Can be readily applied to publicly traded companies.

Cons:

• Can be influenced by market sentiment and investor expectations.
• May not accurately reflect the underlying value of the business.
• Requires careful selection of an appropriate earnings multiple.

Best For: Businesses with consistent and strong earnings, often used for companies with proven profitability.

Example: A consulting firm has an EBITDA of $400,000. Based on industry standards, a multiple of 5 is applied to the EBITDA, resulting in an estimated business value of $2 million.