If you’re looking for investors or are ready to sell your business, you need to determine its value. How do you estimate the economic worth of your business? You might have been in business for 20 years without ever having to do it. Or maybe you’ve only been up and running for six weeks.
At some point, you’ll likely find a need to place a cash value on your company. Yet, it’s unlikely you are a financial expert, so how do you figure out what your business is worth? tor ben
Follow the steps in this article to calculate your business’s value.
- What Are 3 Ways to Value a Company?
- How do You Value a Business Quickly?
- What is The Rule of Thumb For Valuing a Business?
- How Many Times Revenue is a Business Worth?
- How to Value a Business UK
- How to Value a Business Formula
- How to Value a Business Calculator NZ
- How to Value a Business Calculator UK
- Business Valuation Methods
- How to Value a Business Based on Revenue
- How to Value a Business Based on Turnover
- How to Value a Business For Sale
- How to Value a Business For Investors
- How to Value a Business With no Assets
- How to Value a Business With Debt
- How to Value a Business Based on Profit
- Small Business Valuation Methods
- What is a Business Worth Calculator?
- How Much Should I Pay For a Business?
- How do I Value my Jewelry Business?
- How do You Value a Professional Service Business?
- How do You Value Goodwill When Selling a Business?
- How do You Value a Private Service Company?
- How to Value a Property
- How to Value a Startup
- How to Value a House
- How to Value a Company Formula
- How to Value a Land
- How to Value Stock
- How to Value a Bank
What Are 3 Ways to Value a Company?
When valuing a company as a going concern, there are three main valuation methods used by industry practitioners: (1) DCF analysis, (2) comparable company analysis, and (3) precedent transactions.
Read Also: How to Write a Business Proposal
These are the most common methods of valuation used in investment banking, equity research, private equity, corporate development, mergers & acquisitions (M&A), leveraged buyouts (LBO), and most areas of finance.
Method 1: Comparable Analysis (“Comps”)
Comparable company analysis (also called “trading multiples” or “peer group analysis” or “equity comps” or “public market multiples”) is a relative valuation method in which you compare the current value of a business to other similar businesses by looking at trading multiples like P/E, EV/EBITDA, or other ratios. Multiples of EBITDA are the most common valuation method.
The “comps” valuation method provides an observable value for the business, based on what other comparable companies are currently worth. Comps are the most widely used approach, as they are easy to calculate and always current.
The logic follows that if company X trades at a 10-times P/E ratio, and company Y has earnings of $2.50 per share, company Y’s stock must be worth $25.00 per share (assuming the companies have similar attributes).
Method 2: Precedent Transactions
Precedent transactions analysis is another form of relative valuation where you compare the company in question to other businesses that have recently been sold or acquired in the same industry. These transaction values include the take-over premium included in the price for which they were acquired.
The values represent the en bloc value of a business. They are useful for M&A transactions but can easily become stale-dated and no longer reflective of the current market as time passes. They are less commonly used than Comps or market trading multiples.
Method 3: DCF Analysis
Discounted Cash Flow (DCF) analysis is an intrinsic value approach where an analyst forecasts the business’ unlevered free cash flow into the future and discounts it back to today at the firm’s Weighted Average Cost of Capital (WACC).
A DCF analysis is performed by building a financial model in Excel and requires an extensive amount of detail and analysis. It is the most detailed of the three approaches and requires the most estimates and assumptions.
However, the effort required for preparing a DCF model will also often result in the most accurate valuation. A DCF model allows the analyst to forecast value based on different scenarios and even perform a sensitivity analysis.
For larger businesses, the DCF value is commonly a sum-of-the-parts analysis, where different business units are modeled individually and added together.
How do You Value a Business Quickly?
Oscar Wilde once said that “people know the price of everything and the value of nothing.” The following business valuation methods should change all that.
1. Assets
The asset valuation method is suitable for businesses with sizable tangible assets. A tangible asset is any asset that takes on a physical form, such as land, buildings, machinery and inventory, whereas an intangible asset is a non-physical asset, like goodwill, brand recognition and intellectual property (copyrights, patents, trademarks and such).
The accounts will show the net book value of the business – that is, total assets minus total liabilities – but they may not factor in things like inflation, appreciation or depreciation, so you’ll need to be sure that all the asset values are up-to-date.
More often than not, this valuation method produces the lowest value for a business because it assumes that the business doesn’t have any goodwill which, in accounting circles, is defined as the difference between a company’s market value (what people are willing to pay for it) and the value of its net assets (assets minus liabilities).
2. Price/earnings ratio (or the multiple of profits)
The price/earnings technique is suitable for businesses with a solid track record of profitability.
It involves:
- Adjusting monthly or annual profits to exclude extraordinary events, such as one-off purchases or costs so that you’ll get a pretty good idea of future profits
- Adding further costs or gains the company makes after it’s been sold or invested in, which produces a final profit figure (called normalised profit)
- Multiplying normalised profit by three to five (which is the standard industry practice)
The resulting figure is the price-earnings ratio. Commonly accepted earnings multiples range from a modest one times earnings (doctors’ offices) to a whopping 25 times earnings (banks or hot tech startups).
3. Entry cost
The entry valuation model values a business by estimating the cost of starting up a similar business from the ground up.
You’ll need to calculate the cost of employing people, delivering training, developing products and services, building assets and a client base. The whole shebang, really.
4. Discounted cashflow
Reported to be Warren Buffet’s preferred business valuation technique, discounted cash flow is applied to mature businesses that are heavily invested and predict stable cash flow over several years to come – an established energy company with a local monopoly would fit the bill, for example.
The discounted cash flow method estimates what a future stream of cash flow is worth today. The valuation is the sum of the dividends forecast for each of the next 15 or so years plus a residual value at the end of the period.
Today’s value of each future dividend is calculated by applying a discount interest rate (typically, anything from 15% to 25%), which takes into consideration the risk and the time value of money (based on the idea that £1 received today is worth more than the same amount received tomorrow). If the estimated value is higher than the current cost of investment, the likelihood is that the investment opportunity is one worth keeping an eye on.
Discounted cash flow is the most complex way of valuing a business and is reliant on assumptions about long-term business conditions.
5. Comparables
A popular method of valuing a business is to consider the value of comparable companies that have sold in recent times or whose value is already in the public domain.
What works for calculating average house prices can work for valuing businesses, too.
6. Industry rules of thumb
Every industry sector has its own standard formula which you can use to value a business operating within it. For instance, retail outfits are normally valued as a multiple of turnover, volume of customers or number of outlets.
By contrast, computer maintenance and mail order businesses are almost exclusively valued by turnover, mobile phone airtime providers by the number of customers and estate agency businesses by the number of outlets.
What is The Rule of Thumb For Valuing a Business?
Rules of thumb in the Guide usually come in two formats. The most commonly used rule of thumb is simply a percentage of the annual sales, or better yet, the last 12 months of sales/revenues. For example, if the total sales were $100,000 for last year, and the multiple for the particular business is 40 percent of annual sales, then the price based on the rule of thumb would be $40,000.
Quite a few experts have said that revenue multiples are likely to be more reliable than earnings multiples. The reason is that most multiples of earnings are based on add-backs to the earnings, which can be a judgment call, as can the multiple. Sales or revenues—they’re the same—are essentially a fixed figure.
One might want to subtract sales taxes, if they have not been deducted, but the sales are the sales. The only judgment then is the percentage. When it is supplied by an expert, the percentage multiplier becomes much less of a judgment call.
Another rule of thumb used in the Guide is a multiple of earnings. In small businesses, the multiple is used against what is termed Seller’s Discretionary Earnings (SDE). It is usually based on a multiple (generally between 0 and 4), and this number is then used as a multiple against the earnings of the business. Many of the entries also contain a multiple of EBIT and/or EBITDA.
The terms used to express earnings are as follows:
EBDIT (EBITDA) Earnings before depreciation (and other non-cash charges), interest, and taxes
EBDT Earnings before depreciation (and other non-cash charges), and taxes
EBIT Earnings before interest and taxes
According to the International Business Brokers Association (IBBA), Seller’s Discretionary Earnings are “The earnings of a business enterprise prior to the following items:
- income taxes
- nonrecurring income and expenses
- non-operating income and expenses
- depreciation and amortization
- interest expense or income
- owner’s total compensation for one owner/operator, after adjusting the total compensation of all owners to market value.”
How Many Times Revenue is a Business Worth?
The times-revenue method refers to a method of valuing a company. It applies multiples to current revenues to arrive at a valuation.
The times-revenue method is beneficial when it comes to measuring the buyers purchase price offer. The multiples values may vary depending on the method of revenue measurement in use or the period taken to consider it.
You can use a 12-months method to measure revenue, based on the actual activity of the companys historical performance. You can also use what we call Pro-forma statements to do the accountability of actual sales or future predictions.
Example one Lets assume that XYZ Companys current revenue is $1 million. To calculate the maximum sales revenue for determining the XYZ Company value, you will use the times-revenue method to achieve this.
Typically, valuing of business is determined by one-times sales, within a given range, and two times the sales revenue. What this means is that the valuing of the company can be between $1 million and $2 million, which depends on the selected multiple.
Example two let us assume that the revenue for ABCs Corporation over the past twelve months was $100,000. Using the times-revenue method, the valuation of the ABC corporation will be somewhere between $50,000 and$200,000. The $50,000 is termed as half times revenue, while $200,000 is two times revenue.
When it comes to small business valuation, more focus is on:
- Finding a floor (the lowest price) an individual would pay for a business. The floor price refers to the liquidation value of assets a business owns
- Determining a ceiling (maximum price) that an individual is likely to pay, like multiple of current revenues.
As soon as you are through with calculating both the floor and ceiling prices, you can now determine the value an individual is willing to pay to acquire the business.
There are a number of factors that influence the value of multiples individuals use to evaluate the company. The methods may include the industry conditions, macroeconomic environment, among others.
How to Value a Business UK
It’s often said that a business is only worth what someone is willing to pay for it, but there are several methods you can use to reach a sensible figure.
While there are some parts of a business you can value easily, there are always going to be intangible assets.
Beyond stock and fixed assets (like land and machinery), which are tangible and have clear value, you should also look at:
- the business’s reputation
- the value of the business’s customers
- the business’s trademarks
- the circumstances surrounding the valuation (like a forced sale rather than a voluntary one)
- the age of the business (think startups making a loss that have lots of future potential, versus established profit-making companies)
- the strength of the team behind the business
- what kind of product you have
These intangible assets make it fairly difficult to reach an accurate valuation, but there are a number of techniques you can use to make it easier.
Price to earnings ratio (P/E)
Businesses are often valued by their price to earnings ratio (P/E), or multiples of profit. The P/E ratio is suited to businesses that have an established track record of profits.
Working out an appropriate P/E ratio to use can be driven by profits – if a business has high forecast profit growth, it might suggest a higher P/E ratio. And if a business has a good record of repeat earnings, it may have a higher P/E ratio, too.
As an illustration, using a P/E ratio of four for a business that makes £500,000 post-tax profits means it would be valued at £2,000,000.
How you arrive at the right number for your P/E ratio can vary drastically depending on the business. Tech startups often have high P/E ratios, because they’re usually high-growth companies. A more common high-street company, like an estate agency, will have a lower P/E ratio and is likely to be a mature business. You can see quoted companies’ historic P/E ratios in the financial section of the papers.
And as the shares of quoted companies are easier to buy and sell, they’re more attractive to investors. Smaller, unquoted companies usually have around a 50 per cent lower P/E ratio than their quoted counterparts.
Because P/E ratios differ wildly, there isn’t necessarily a ‘standard’ ratio that can be used to value all businesses. Having said that, a business adviser might suggest a valuation of four to 10 as a P/E ratio.
Entry cost
This is a simple one – how much would it cost to set up a similar business to the one being valued?
You need to factor in everything that got the business to where it is today. Make a note of all the startup costs, then its tangible assets. How much would it cost to develop any products, build up a customer base, and recruit and train staff?
After that, think about savings you could make when setting up. If you can save by locating the business somewhere else or by using cheaper materials, subtract that from the figure.
When you’ve taken everything into account, you’ve got your entry cost – and a valuation.
Valuing the assets of a business
Stable, established businesses with a lot of tangible assets are often suited to being valued on these assets. Good examples of businesses like this are those in property and manufacturing.
To do an asset valuation, you need to start with working out the Net Book Value (NBV) of the business. These are the assets recorded in the company’s accounts.
Then, you should think about the economic reality surrounding the assets. Essentially, this means adjusting the figures according to what the assets are actually worth.
For instance, old stock depreciates in value. If there are debts that aren’t likely to be paid, knock those off. And property could have changed in value, so refine those figures, too.
Discounted cash flow
This is a complex way of valuing a business, relying on assumptions about its future. The technique is suited to mature businesses with stable, predictable cash flows – think of utilities companies.
Discounted cash flow works by estimating what future cash flow would be worth today. You can reach a valuation by adding the dividends forecast for the next 15 or so years, plus a residual value at the end of the period.
You calculate today’s value of each future cash flow using a discount rate, which accounts for the risk and time value of the money. The time value of money is based on the idea that £1 today is worth more than £1 tomorrow, because of its earning potential.
Normally, the discount interest rate can be anything from 15 to 25 per cent.
How to Value a Business Formula
The price earnings ratio (P/E ratio) is the value of a business divided by its profits after tax. For example, a company with a share price of $40 per share and earnings per share after tax of $8 would have a P/E ratio of five (40/8 = 5).
When valuing a business, you can use this equation: Value = Earnings after tax × P/E ratio.
Once you’ve decided on the appropriate P/E ratio to use, you multiply the business’s most recent profits after tax by this figure. For example, using a P/E ratio of 6 for a business with post-tax profits of $100,000 gives a business valuation of $600,000.
How to Value a Business Calculator NZ
There are many different ways of valuing a business for sale in New Zealand. Many of these methods have been devised for large businesses, especially those listed on share markets. Smaller businesses (i.e. those that have less than 20 employees, – and 96% of all New Zealand businesses are in that size range) need a different approach.
Sales contracts for small businesses normally define the value as the sum total of the inventory (stock), plus plant & fittings, plus goodwill. (Debtors and creditors are not normally part of the sale contract.)
When valuing a business for sale the value of the business is largely influenced by profit. A person who buys a business is purchasing a future cash flow. The higher the anticipated cash flow, the higher the value of the business.
Past profits may be a good indication of future cashflow, but there is no guarantee that profits will continue at the same rate. In some cases there will be signs that profit is increasing, in others a downward trend may indicate lower expectations.
Other factors such as impending rent increases, new competitors or the loss of a major contract may also raise concerns about the level of profits that can be expected in the future. Each party to a sale must form their own ideas about the future cash flow.
Defining Profits for Valuation:
There are many different measures of profit. (e.g. profit before tax or profit after tax etc.) When valuing small businesses the most useful measure of profit is known as EBPIDT – Earnings Before Proprietors Income (wages or drawings) Interest and Depreciation. (This is sometimes called the Sellers Discretionary Cashflow.) This determines the basic earning capability of the businesses before any other variables.
Business Valuation Method:
One method used to value a business is to use an Earnings Multiplier. For example, a business which has a profit of $60,000 may sell for $90,000. The Earnings Multiplier in this case is 1.5 ($60,000 X 1.5 = $90,000)
Earnings Multiples:
How do you work out what earnings multiple to use? Avoid “Rules of Thumb.” Most of these are likely to be out of date at best, and downright misleading at the worst.
There are several ways of finding an appropriate Earnings Multiplier.
– Ask acquaintances who have recent sold/bought similar businesses to the one you are interested in.
– Ask your accountant. They may have had clients who have been involved in sales of similar businesses.
– Your business broker can share his/her experience.
– Use a commercial data base which lists sales by business brokers throughout NZ “BizStats”. This will tell you what earnings multiples have been used in recent sales and help you value a business. It will cost you $150 + GST and may provide a useful guidelines in doing business valuations.
How to Value a Business Calculator UK
There are a couple of different valuation methods you can use, starting with the simplest.
Turnover valuation
Follow these steps:
- Find your average weekly sales. You can do this by dividing the total turnover for the financial period by the number of weeks (leaving out VAT). You can even include the previous financial period if the data is available, remembering to divide by the increased number of weeks.
- Multiply by your sector value. The next step is to multiply your average weekly sales by the number of weeks that equates to a fair value for the business. This varies by sector, so for a hair salon it’s between 10 and 15 weeks, while for restaurants it could be as many as 30 weeks.
The total formula to remember is: (turnover / number of weeks) x sector multiple = business valuation.
Let’s do a quick example.
Say you’re a hair salon with a turnover of £75,000 in the last tax year. You’ll divide this by 52 weeks, making your average weekly turnover around £ 1,442. If your sector multiplier as a hair salon is 12, this makes the turnover-based value of your business £17,307. |
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Price to earnings ratio (P/E) valuation
To work out your company value using P/E, start by choosing an appropriate P/E ratio to use.
This can be complicated, as it depends on the sector, size, history and performance of your business. However, most businesses use a P/E ratio of between 4 and 10, with a higher figure used for companies with high forecast profit growth or a record of repeat earnings. Here are a few examples:
- Owner managed businesses typically have a P/E of 0 to 2.5
- Small businesses with profits up to £500K have a P/E of 2 to 7
- Small enterprises with profits over £500K have a P/E of 3 to 10.
The P/E ratio can also be calculated by dividing the price per share by the earnings per share.
To find your company value, simply multiply your P/E ratio by your post-tax profits for the year.
The formula for P/E valuation is simply: profit x P/E ratio = valuation.
To help you see how it all works, let’s do another quick example.
We’ll use the same hairdressing business earning £75,000 a year, although remember that P/E valuation is most often used for public rather than private companies. If we give the business a P/E ratio of 2 (as an owner-managed business earning less than £500K), this makes the value of the business £150,000. |
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As you can see, this gives you a quite different valuation compared to the first example. This is why using a variety of valuation methods, and choosing the right fit for your particular business, is so important. What’s right for another business may not be a suitable option for yours.
Business Valuation Methods
There are numerous ways a company can be valued. You’ll learn about several of these methods below.
1. Market Capitalization
Market capitalization is the simplest method of business valuation. It is calculated by multiplying the company’s share price by its total number of shares outstanding. For example, as of January 3, 2018, Microsoft Inc. traded at $86.35.1 With a total number of shares outstanding of 7.715 billion, the company could then be valued at $86.35 x 7.715 billion = $666.19 billion.
2. Times Revenue Method
Under the times revenue business valuation method, a stream of revenues generated over a certain period of time is applied to a multiplier which depends on the industry and economic environment. For example, a tech company may be valued at 3x revenue, while a service firm may be valued at 0.5x revenue.
3. Earnings Multiplier
Instead of the times revenue method, the earnings multiplier may be used to get a more accurate picture of the real value of a company, since a company’s profits are a more reliable indicator of its financial success than sales revenue is.
The earnings multiplier adjusts future profits against cash flow that could be invested at the current interest rate over the same period of time. In other words, it adjusts the current P/E ratio to account for current interest rates.
4. Discounted Cash Flow (DCF) Method
The DCF method of business valuation is similar to the earnings multiplier. This method is based on projections of future cash flows, which are adjusted to get the current market value of the company. The main difference between the discounted cash flow method and the profit multiplier method is that it takes inflation into consideration to calculate the present value.
5. Book Value
This is the value of shareholders’ equity of a business as shown on the balance sheet statement. The book value is derived by subtracting the total liabilities of a company from its total assets.
6. Liquidation Value
Liquidation value is the net cash that a business will receive if its assets were liquidated and liabilities were paid off today.
This is by no means an exhaustive list of the business valuation methods in use today. Other methods include replacement value, breakup value, asset-based valuation and still many more.
How to Value a Business Based on Revenue
Revenue is the crudest approximation of a business’s worth. If the business sells $100,000 per year, you can think of it as a $100,000 revenue stream. Often, businesses are valued at a multiple of their revenue. The multiple depends on the industry.
For instance, a business might typically sell for “two times sales” or “one times sales.” If you have a good stockbroker, he or she may be able to help you research typical sales multiples for your industry. A good business broker can also help you if he or she has done valuations in the industry you’re investigating.
But alas, revenue doesn’t mean profit. If, for example, how much would you pay for a business that had an ongoing $4 billion per year revenue that you have to pump an additional $380 million per year into just to keep it afloat?
That’s why earnings matter and why multiples of earnings may be a better way to think about valuation. If a company had a profit of $10,000, that cash can be used for growth or dividends to you, the shareholder.
Estimate the earnings for the next few years and ask how much that income stream is worth to you. Be careful, though. Don’t just assume earnings will be stable. Competition, supplier price changes and a declining industry can affect earnings. Make sure to reflect that in your projections.
How to Value a Business Based on Turnover
Turnover is a good indicator of how popular your product is. Unfortunately, it says little about your costs, investments and how efficient your operations are.
Still, sales-based valuations have their place. If you have a relatively new business, you may not have a set of company accounts yet. You may not have run through a full 12 months of normal overheads yet. Your circumstances may prompt a need for a business valuation. This is where a value assessment based on turnover can fulfill that need.
The starting point of turnover based valuation is the average weekly sales. To get that figure, take your total turnover to date for your current financial period. If available, add your turnover for previous financial period too. Then, divide that sum by the number of weeks in that period. When calculating your average weekly sales, exclude VAT.
If you find out your average weekly takings over a period of time, this will leave out seasonal changes in performance as well as other extraordinary circumstances. It will level out one-off incidents which may have positively or adversely affected trade.
Next comes a tricky part of the valuation. This is not exact science, but rather a method developed by having an experience with businesses in various sectors. Once you have your average weekly turnover, you have to decide how many weeks of that turnover equate to a fair value for the business.
This is usually sector-specific, below are some examples that we’ve worked within the past. Weekly multiples will depend on the quality of the fixtures so the actual numbers might vary slightly.
- Convenience stores – x8 weeks if gross profit is over 20%, plus 5 weeks lottery takings if you sell lottery tickets;
- Traditional greengrocers – x10 weeks;
- Hair & beauty salons – between x10 and x15 weeks depending on the quality of the fixtures and fittings being left in the business;
- Cafes, takeaways – x20 weeks;
- Restaurants – x30 weeks of turnover.
Once you multiply your weekly turnover by the sector value, you’ll get your business valuation based on turnover. Here is the full formula to use:
(turnover / number of weeks) * sector multiple = business valuation
How to Value a Business For Sale
These tips will help you calculate the best price before putting your business up for sale.
1. Prepare the financial statements and determine the SDE.
The first rule of thumb for business valuation is preparing the company’s financial statements. The owner should gather the financial records for the past three years including an income statement, a cash flow statement and a balance sheet. If the business hasn’t been operating for three years, consider using a projection model.
Next, work with an accountant to transform the income statement into a seller’s discretionary earnings (SDE) statement, which considers non-recurring purchases and discretionary expenses to more accurately reflect the value of your business. SDE gives you a better idea of the true profit of your business because it includes expenses that aren’t required to run the business.
These expenses include your salary (and the salary of any additional owners), travel that’s not essential to the business, relatives that have non-essential positions, charitable donations, leisure activities, and one-time expenses like settling a lawsuit.
2. Establish the asset value of the business.
The second rule of thumb for business valuation is to establish the asset value of the business. First, estimate the value of the company’s tangible assets by taking inventory of all the physical aspects of the business such as fixtures, equipment and inventory. Real estate, cash on hand, and accounts receivable are also included.
Next, estimate the value of the company’s intangible assets, including intellectual property, contracts, partnerships, brand recognition, and more. Assigning value to intangible assets can be tricky and it may be best to consult with a business broker or professional appraiser.
While asset valuation gives you a clearer picture of the business’s current value, it fails to clearly reflect the value of the company’s earning potential. Since buyers are primarily interested in their investment’s future earnings, it’s a good idea to quantify an estimate of the company’s earning potential through price multiples.
3. Use price multiples to estimate the value of the business.
Another valuation rule of thumb is using price multiples, which base the value of the business on a multiple of its potential earnings. Price multiples provide buyers with a tool to estimate their return on investment. They are a quick way to arrive at a general estimate of the business’s sale price.
Once you’ve established the asset valuation of the business, the next step is to determine the multiple that applies to the geographical region and type of industry. These numbers combine to form an equation that results in a fair estimate of the business’s sale price.
For example, nationally the average business sells for around 0.6 times its annual revenue. Once you’ve determined the annual revenue and found the correct multiplier, it becomes a simple matter of plugging the numbers in and then doing the math. The trick is to find the right multiplier for the business, since they can vary quite a bit.
Some of the factors that add to the variance we’ve already reviewed such as assets and SDE. Future prospects of the business should also be taken into account. For example, if an industry is experiencing a boom and popularity is growing, that would increase your multiplier. However, if the business does not offer seller financing, the multiplier may decrease.
Also, a change in ownership can mean changes in supplier relationships. Customers who were once loyal to an owner may start going elsewhere. These types of issues are called “owner risk.” If an existing business has a great deal of owner risk, it may not survive a transition to a new owner. Those risks can negatively impact the overall value of a business.
4. Use comparable (or comps) of ‘For Sale’ and sold businesses.
Recent sales of comparable businesses (or ‘comps’) are a popular valuation rule of thumb that will offer you a realistic picture of what similar businesses are selling for. By identifying examples of similar businesses that have sold in the same area, you can get a better sense of a realistic selling price.
Comp data can be accessed through several online sources, as well as through business brokers, who can help to provide you with the right multiplier for your market. BizBuySell provides an inventory of over hundreds of thousands of successfully sold businesses and over 50,000 businesses listed for sale. You can narrow your search by industry and geographic location, and then narrow it further by gross income and cash flow.
5. Improve the value of the business.
If an owner is disappointed when they discover the estimated value of the business, there are many ways to improve it. In fact, the sooner the owner begins working on increasing the business’s selling price the better. Remember that buyers are interested in businesses that offer the greatest potential for future profit. Documentation of several years of profit growth will add value to the company.
Buyers are looking for an easy transition into their new business, so evidence that the business is well-organized and running smoothly will also add to the company’s value.
A clean and well-oiled machine with a neat, organized package of detailed financial records, compliance with health and safety regulations, renewable leases, employee policies, staff with transferable contracts, supplier lists and an established client base will go a long way. Potential buyers will be impressed and more likely to feel the business is a good investment for them.
Seller financing is yet another way that owners can potentially improve the value of a business. Partially financing the sale can benefit the owner with a higher selling price, collected interest, and a wider field of potential buyers.
6. Consult with a professional appraiser and get a formal valuation.
Hiring a professional business appraiser not only allows you to benefit from his or her expertise, it provides the objectivity that you may lack when it comes to making a fair assessment of the business. Many brokers are experienced at conducting a formal valuation or have connections with qualified professionals.
A qualified professional should have the designation of Accredited in Business Valuation (ABV). Accountants who have earned this certification are required to pass an exam administered by the American Institute of Certified Public Accountants (AICPA). In addition to the exam, these specialists must meet business experience and education requirements to be certified.
Valuing a business correctly is essential in a competitive market, and enlisting the help of a third-party professional will not only eliminate seller sentiment from the sales process, it will also shorten it by aligning the business value with up-to-date market conditions.
How to Value a Business For Investors
Most venture capital funds (VCs) investing in early-stage companies will use two valuation methodologies to establish the price they will pay for an investment:
- Recent comparable financings: The VC will identify similar companies, in sector and stage, as the investment opportunity. Several databases—including VentureSource, Venture Wire and VentureXpert —might provide information that establishes a valuation range for comparable companies. However, transactions that are more than two years old are not considered market. Although some information may not be public, many entrepreneurs and VCs know through word of mouth what the recent valuations have been for comparable companies.
- Potential value at exit: VCs and other investors have a good sense of a company’s exit value. The value can be based either on recent merger and acquisition (M&A) transactions in the sector or the valuation of similar public companies. Most early-stage investors look for 10 to 20 times the return on their investment (later-stage investors tend to look for 3 to 5 times the return) within two to five years.
- For example, assume an exit valuation of $100 million and the VC owns 20% of the company at the time of the exit. The VC would earn $20 million on their investment at exit. If the VC invested $1 million into the company, they would make 20 times their investment. If the VC owned 20% for a $1 million investment, then the post-money valuation of the company at the time of the initial investment was $5 million. As you can see, investors use the post-money valuation to estimate the price an investment must command when they exit or sell the company.
Investors will use these methodologies to set a valuation range. They will have a maximum valuation based on their view of the future valuation and the perceived competitiveness for the deal, but will try to keep the price they pay closer to the lower part of the range.
How to Value a Business With no Assets
Establishing the physical asset value of a business is a fairly straightforward task. But what about the value of intangible assets? Furthermore, what about a service business that has minimal to no assets, physical or otherwise?
Thankfully, assets are not a requirement for a business to have value. Profit, or the potential for profit, is; so, let’s consider how to value a business with no assets.
Option 1: Market Comparison
Market-based business valuations calculate your business’s value by comparing it to similar businesses that have previously sold. This method applies well to a business with no assets, but comes with the challenge of identifying sufficiently comparable competitors (who would presumably also have no assets.) The helpfulness of this comparison also depends, of course, on your access to sufficient market data on these competitors.
There are two main approaches to market-based business valuations:
- Sales-based: derives a sales multiple by comparing the company’s revenue to the sales of a similar company that has recently sold.
- Profit-based: derives a profit multiple by comparing the company’s profits to the profits of a similar company that has recently sold.
Option 2: Earnings
Earnings-based business valuations value your business by its ability to be profitable in the future. This method is certainly helpful for a business with no assets, and is also best suited for stable, profitable businesses.
There are two main earnings-based approaches:
- Capitalization of Earnings: calculates future profitability based on cash flow, annual ROI, and expected value.
- Multiple of Earnings: calculates a business’s value by assigning a multiplier to its current revenue or EBITDA. (The appropriate multiplier varies widely depending on the specific industry, current market trends, and economic climate.)
Option 3: Cash Flow
Discounted Cash Flow (DCF) or income-based valuations calculate a business’s value based on its projected cash flow, which is then partially discounted to account for a buyer’s risk.
How to Value a Business With Debt
Your ultimate valuation should be the result of consistent calculations, so don’t mix and match formulas. That said, doing the math is free, so go ahead and plug your earnings numbers into different formulas, and compare. Investigate numbers that don’t seem right, and don’t be afraid to call in an accountant for extra help.
1. Income approach
The income approach to business valuation determines the amount of income a business can expect to generate in the future. If you want to take the income approach, you can choose between two commonly used valuation methods.
Discounted cash flow method: This method determines the present value of a business’s future cash flow. The business’s cash-flow forecast is adjusted (or discounted) according to the risk involved in purchasing the business. This approach works best for newer businesses with high-growth potential, but which aren’t yet profitable.
Capitalization of earnings method: The capitalization of earnings method also calculates a business’s future profitability, taking into account the business’s cash flow, annual rate of return (or ROI), and its expected value.
But where the discounted cash flow method accounts for more fluctuations in a business’s financial future, the capitalization method assumes that calculations for a single period of time will continue in the future. So, established businesses with stable profitability often use this valuation approach.
Most online business valuation calculators use a variation of the income approach. But if you have more financial information on hand, you can try a more comprehensive business valuation tool that includes both profit and revenue, as well as assets and liability, in the calculation.
2. Asset-driven approach
Another common method attributes value to a business based solely on its assets. In particular, the Adjusted Net Asset Method calculates the difference between a business’s assets—including equipment, property, and inventory, and intangible assets—and its liabilities, both of which are adjusted to their fair market values.
Asset valuations are also a great tool for internal use, and can help you keep track of spending and capital resources.
To do an asset-driven assessment, you’ll make a list of your assets and assign them a monetary value. For equipment or other depreciating assets, that value is usually somewhere between the sale price and the depreciated value. A good rule of thumb is to estimate how much a piece of equipment would sell for today, and use that number.
Because you’re familiar with your own equipment and production, you can make pretty accurate estimates of each of your asset’s value and depreciation. Even if you don’t adjust the asset’s worth according to the current market, you can still get a good sense of a business’s material value.
This method is especially useful if your business mostly holds investments or real estate; isn’t profitable; or if you’re seeking to liquidate. In any of those cases, buyers will be interested in the individual value of your investments or equipment.
3. Market approach
As you can deduce from its name, the market approach to valuing a business determines a company’s value based on the purchases and sales of comparable companies within the same industry. This approach will specifically help you determine an appropriate selling or purchase price based on your local market.
Any business can use this approach to business valuation, as long as they can gather sufficient, relevant data on which to compare their business. It can be an especially useful approach for rapidly growing businesses and industries.
How to Value a Business Based on Profit
These are four of the most commonly used business valuation methods. Understanding them will help you with your own research and when you get independent advice from a business valuer or broker.
1. What is the asset valuation method?
This method tells you what the business would be worth if it closed down and was sold today, after all assets and liabilities were accounted for.
How it works
Assets such as cash, stock, plant, equipment and receivables are added together. Liabilities, like bank debts and payments due, are then deducted from this amount. What’s left is the net asset value.
For example, Richard wants to buy a manufacturing business. It has $300,000 worth of assets and $200,000 of liabilities. Its net asset value is $100,000, so with the asset valuation method, this business is worth $100,000.
What about goodwill?
Goodwill is the difference between the true value of a business and the value of its net assets. Goodwill represents the features of a business that aren’t easily valued, such as location, reputation and business history. It’s not always transferred when you buy a business, since it can come from personal factors like the owner’s reputation or customer relationships.
The asset valuation method doesn’t take goodwill into account. If a business is underperforming and has no goodwill, then using net asset valuation could be an accurate way to value it.
2. What is the capitalized future earnings method?
This is the most common method used to value small businesses.
When you buy a business, you’re buying both its assets and the right to all profits it might generate in the future, which are known as future earnings. The future earnings are ‘capitalised’, or given an expected value. The capitalisation value gives the expected rate of return on investment (ROI), shown as a percentage or ratio. A higher ROI is a better result for the buyer.
The capitalised future earnings method lets you compare different businesses to work out which would give you the best ROI.
How it works
- Work out the business’ average net profit for the past three years. Take into account whether there are any conditions that might make this figure hard to repeat
- Work out the expected ROI by dividing the business’ expected profit by its cost and turning it into a percentage
- Divide the business’ average net profit by the ROI and multiply it by 100. Use this figure as the value of the business
For example, David is considering buying a bakery with an average net profit of $100,000 after adjustments.He wants an ROI of 20%. He divides $100,000 by 20% and multiplies it by 100 to get a business value of $500,000.
3. What is the earnings multiple method?
This is a method that helps compare different businesses, where the earnings before interest and tax (EBIT) are multiplied to give a value. The ‘multiple’ can be industry specific or based on business size.
How it works
- Find the earnings before interest and tax (EBIT) of the business
- Seek advice from a business valuer for an accurate business earnings multiple
- Multiply your EBIT by your multiple to find the business value
For example, Mary wants to buy a sporting goods store. It has an EBIT of $100,000 and an industry value of 2. This means she values it at $200,000.
4. What is the comparable sales method?
You can get a realistic idea of what you may need to pay for a business by checking out comparable sales. This is the price that similar businesses have sold for.
How it works
Check out the sales of recent businesses in your industry and location. You can get this information from:
- Business brokers, who can also give you an idea about the value of the business you’re interested in
- Business sales listings in industry magazines, newspapers or websites
For example, Susan wants to buy a cafe. Recently, cafes in her location have sold for $150,000, so she knows this is a realistic value for a similar business.
For a detailed understanding of a business’ value, contact a business valuer or broker.
Small Business Valuation Methods
There are three primary ways to value a small business:
- Market Based Approach-The company valuation is derived from what others are willing to pay for similar businesses. Comparable transactions are studied to calculate this valuation.
- Income Based Approach-The company value is derived from its ability to generate cash. Historic performance is studied, future cash generation is projected and discounted to a present value.
- Asset Based Approach-The value of the company is its assets minus liabilities. This approach is most appropriate in liquidations or when intellectual property is unusually valuable.
Early stage startup businesses require an entirely different set of business valuation methods due to their immaturity. What is used to value a mature company doesn’t work for a business just starting out.
Company valuation is not a simple or straightforward task and should generally be performed by a professional specializing in such valuations. While one of the aforementioned calculations may be the most appropriate for your company or the company you are looking to acquire most of the time, each calculation will be done and a value will be reached based on these and other factors.
What is a Business Worth Calculator?
A business valuation calculator helps buyers and sellers determine a rough estimate of a business’s value. Two of the most common business valuation formulas begin with either annual sales or annual profits (also known as seller discretionary earnings), multiplied by an industry multiple. Both methods are great starting points to accurately value your business.
If you’re buying a business, this business valuation calculator is designed to tell you whether you can afford to purchase the business and whether the business is worth its asking price. If you’re a seller, the calculator is a reality check. Essentially it gives you an estimation of the price you can charge if you want to attract potential buyers.
How Much Should I Pay For a Business?
In order to determine what you should pay for a business, you have to first get a sense of what your net income will be. Again, net income is very much a function of your unique circumstances as a small business owner.
Do you any special skills or experience that will add value (and net income to the bottom line)? Do you see opportunities to really make this thing fly? Do you have the ability to turn that vision into reality? If so, the company is worth more to you. Great. But let’s also consider the other alternative.
If you are you a complete novice you will have to bring in other experts to run the show thus adding more cost and making the firm less profitable. That drops the value proposition.
Create an income statement for each of the next 5 years based on your cost and sales assumptions. Take the seller’s existing profit and loss statement and tweak it to reflect what it will look like when you take over.
This is what’s called a “pro forma”. If you don’t feel qualified to do this, talk to a good CPA and have her create these statements for you. It’s worth a few hundred bucks to have this done right.
Multiples
Your next step is determining the “multiple” for this particular business. You take the net earning or gross sales (depending on the industry) and multiply that figure by the “multiple”. Then you make adjustments for inventory and other assets. You can do some hunting on the net or you can speak to a business broker to get a sense of what the multiple is for your particular industry.
Let’s say you are buying an auto repair shop. According the New York Times, the “multiple” is 40% of annual sales plus inventory. So if the shop has annual sales of $300,000 and $100,000 in inventory, the business is worth around $220,000. But you aren’t even close to making an offer yet.
Before you speak to your seller, think about what is going to happen to sales over the next several years. Are you sure you’ll be able to grow those sales? If so, the business is worth more to you. Are you clueless about growth? That being the case, you take a risk when you buy the business because there is no guarantee that those sales will continue. As a result, you can’t offer as much.
Direction
Your next consideration is momentum. Look at the tax returns and financial statements. If sales are increasing, find out why. Will you be able to keep that positive direction going? If sales are declining, find out why. Can you turn it around? If not, you might be making a big mistake. I suggest you look for another opportunity.
The Offer
At this point, you have a great deal of information. You know what the business is worth to you. You know what your risks and opportunities are. And you also know what the business is worth to the seller. At this point, get the seller to present the first number.
If the business is on a huge growth track but the seller is highly motivated to sell the business fast, it might be a great deal to pay her the multiple on current sales plus inventory. Even if she asks a bit more, it could still be a good deal if you are sure you’ll be able to capitalize and continue that growth.
If on the hand sales are declining it’s a different story. Discuss the multiple that is generally acceptable but make an offer based on what sales are going to look like over the next 5 years if the current decline continues.
Of course, the business is worth much more to you because you are going to turn that around (if that’s not the case please don’t buy this business). But there is no certainty that you’ll be able to actually turn this sow’s ear into a silk purse so make sure the price is reduced to reflect your risk.
How do I Value my Jewelry Business?
Savvy business owners prefer to know the value of their retail jewelry business, even if they do not plan to sell or expand.
You may want to do this computation monthly if your business has multiple locations or high volume to catch negative business trends early and fix any problems before they get too big. Otherwise, valuing the business quarterly should be sufficient, perhaps at the same time that you pull information for the quarterly tax payments.
Jewelers are at the mercy of the precious metals markets, and the volatility in this sector has a direct effect on the value of your business. The value of your business varies with the market price of gold, as retail jewelry sales decrease when the price of gold increases.
If you notice your business value dropping, you can reduce spending or payroll or increase advertising to compensate for the downward trend.
Cash Assets
Assess the value of all cash assets. This includes unsold jewelry inventory, all monies due during the next 90 days, plus any investments owned by the company that you could convert into cash within 30 days.
Some investments have two values: the book value and the current market value. You will find the book value of stocks and other investments on your company financial ledger. You can check market value, the current selling price, with your broker.
Non-cash Assets
Assess the value of the business’s non-cash assets, such as equipment and supplies. This category includes investments that would take longer than 30 days to liquidate, such as real estate or municipal bonds. As with cash assets, some investments have two values.
Liabilities
Add the amount of money that the business is obligated to pay during the next 90 days. This includes employee payroll and benefits, overhead, such as rent and utilities, payments to suppliers, fees and licenses, among the other expenses your jewelry store incurs.
Determining Value
The formula is: cash assets + non-cash assets – liabilities due during the next 90 days = value. If your jewelry store is new, then it may have a negative value that reflects costs associated with purchasing the initial inventory.
A jewelry store may have good sales, but declining value if the price of gold drops significantly below its level from when you purchased inventory. This knowledge helps you to manage the jewelry store effectively by enabling you to make adjustments to your business plan that address the cause of a declining or negative value.
If you do not track your jewelry store’s value regularly, then you might not notice a negative trend when it first develops when damage is still minimal and little long-term effects are felt.
How do You Value a Professional Service Business?
Depending on the size of the professional practice, preserving professional goodwill through a transaction can be challenging. However, transferability of personal or professional goodwill can happen with strategic planning and cooperation between a buyer and seller.
Many times, a non-compete agreement is used to help ensure the professional will not attempt to poach clients or employees after a sale. But this also becomes the crux of the valuation puzzle — how to put a value on a business that has so much vested in specific professionals and benefits from their respective reputations?
In general, the primary factors to consider when valuing a professional practice are:
- Type and stability of earnings or cash flows
- Compensation of the professionals in relation to market compensation
- Qualifications and work habits of the professionals
- Age and health of the professionals, including internal transition planning
- Reliance on referrals versus contracted work
- Type of clients or patients served
- Geographic locations
- Local supply of professionals and competition
- Previous ability to transfer clients or patients
Given that most professional practices use a cash-basis of accounting, certain financial statement adjustments should be considered in the valuation:
- Accounts receivable, including whether the accounts receivable is tied to the professional or the business
- Unbilled work-in-process or fees
- Accounts payable
- Deferred liabilities, such as deferred revenue from client retainer fee payments
- Contingent liabilities, such as lawsuits or billing disputes
The most common business valuation methods used when valuing a professional practice are:
- Excess earnings (hybrid of an asset and income approach)
- Discounted cash flow or capitalized cash flow method
- Guideline transaction method (i.e., market multiples from similar transactions)
- Previous internal transactions based on a buy-sell agreement or internal formula
- Previous external transactions, such as a recently completed acquisition
While determining the value of a professional services firm can be challenging, understanding the elements that provide value can help provide a clear picture of both the tangible and intangible value of the business.
How do You Value Goodwill When Selling a Business?
When a business is sold for more than the fair market value of its tangible assets, the difference in the selling price and the value of the assets being acquired is recorded on the buyer’s balance sheet as goodwill.
The value of goodwill, which is determined by a calculation, is the amount attributed to intangible assets the buyer is acquiring. Intangible assets usually included when selling a business include: business reputation, brand recognition, customer and supplier lists, employee knowledge, internal processes, etc.
There may be other intangibles as well such as copyrights, trademarks, patents, trade secrets, customized software and/or databases, etc.
How to Calculate Goodwill When Selling a Business
The best way to understand how to value goodwill when selling a business is to provide an example.
Let’s assume a seller has a machine shop with $2,500,000 in revenues and $500,000 of seller’s discretionary earnings (SDE). In a business sale structured as an asset sale, a multiple of 4x would yield a business valuation of $2,000,000 for the machine shop. (This example assumes the seller is retaining all accounts receivable and cash as of closing and is responsible for paying off all liabilities at closing.)
Now let’s assume the machine shop has equipment with a fair market value of $1,200,000 and inventory of $150,000. The value of goodwill is the purchase price of the business ($2,000,000) less the value of the tangible assets ($1,350,000) which calculates to $650,000 as the value assigned to goodwill.
How do You Value a Private Service Company?
Private company valuation is the set of procedures used to appraise a company’s current net worth. For public companies, this is relatively straightforward: we can simply retrieve the company’s stock price and the number of shares outstanding from databases such as Google Finance. The value of the public company, also called market capitalization, is the product of the said two values.
Such an approach, however, will not work with private companies, since information regarding their stock value is not publicly listed.
Moreover, as privately held firms often are not required to operate by the stringent accounting and reporting standards that govern public firms, their financial statements may be inconsistent and unstandardized, and as such, are more difficult to interpret.
Common Methods for Valuing Private Companies
1. Comparable Company Analysis (CCA)
The Comparable Company Analysis (CCA) method operates under the assumption that similar firms in the same industry have similar multiples. When the financial information of the private company is not publicly available, we search for companies that are similar to our target valuation and determine the value of the target firm using the comparable firms’ multiples. This is the most common private company valuation method.
To apply this method, we first identify the target firm’s characteristics in size, industry, operation, etc., and establish a “peer group” of companies that share similar characteristics. We then collect the multiples of these companies and calculate the industry average.
While the choices of multiples can depend on the industry and growth stage of firms, we hereby provide an example of valuation using the EBITDA multiple, as it is one of the most commonly used multiples.
The EBITDA is a firm’s net income adjusted for interest, taxes, depreciation, and amortization, and can be used as an approximate representation of said firm’s free cash flow. The firm’s valuation formula is expressed as follows:
Value of target firm = Multiple (M) x EBITDA of the target firm
Where, the Multiple (M) is the average of Enterprise Value/EBITDA of comparable firms, and the EBITDA of the target firm is typically projected for the next twelve months.
2. Discounted Cash Flow (DCF) method
The Discounted Cash Flow (DCF) method takes the CCA method one step further. As with the CCA method, we estimate the target’s discounted cash flow estimations, based on acquired financial information from its publicly-traded peers.
Under the DCF method, we start by determining the applicable revenue growth rate for the target firm. This is achieved by calculating the average growth rates of the comparable firms. We then make projections of the firm’s revenue, operating expenses, taxes, etc., and generate free cash flows (FCF) of the target firm, typically for 5 years. The formula of free cash flow is given as:
Free cash flow = EBIT (1-tax rate) + (depreciation) + (amortization) – (change in net working capital) – (capital expenditure)
We usually use the firm’s weighted average cost of capital (WACC) as the appropriate discount rate. To derive a firm’s WACC, we need to know its cost of equity, cost of debt, tax rate, and capital structure. Cost of equity is calculated using the Capital Asset Pricing Model (CAPM). We estimate the firm’s beta by taking the industry average beta. Cost of debt is dependent on the target’s credit profile, which affects the interest rate at which it incurs debt.
We also refer to the target’s public peers to find the industry norm of tax rate and capital structure. Once we have the weights of debt and equity, cost of debt, and cost of equity, we can derive the WACC.
With all the above steps completed, the valuation of the target firm can be calculated as:

It should be noted that performing a DCF analysis requires significant financial modeling experience. The best way to learn financial modeling is through practice and direct instruction from a professional. CFI’s financial modeling course is one of the easiest ways to learn this skill.
3. First Chicago Method
The First Chicago Method is a combination of the multiple-based valuation method and the discounted cash flow method. The distinct feature of this method lies in its consideration of various scenarios of the target firm’s payoffs.
Usually, this method involves the construction of three scenarios: a best-case (as stated in the firm’s business plan), a base-case (the most likely scenario), and a worst-case scenario. A probability is assigned to each case.
We apply the same approach in the first two methods to project case-specific cash flows and growth rates for several years (typically a five-year forecast period). We also project the terminal value of the firm using the Gordon Growth Model. Subsequently, the valuation of each case is derived using the DCF method. Finally, we arrive at the valuation of the target firm by taking the probability-weighted average of the three scenarios.
This private company valuation method can be used by venture capitalists and private equity investors as it provides a valuation that incorporates both the firm’s upside potential and downside risk.
How to Value a Property
Wonder what your house — or a house you might buy — is really worth?
Knowing how to calculate your home’s value with the help of online tools and trained professionals better prepares you to buy, sell, refinance, tap into your home’s equity or even negotiate lower property taxes.
It can also provide a picture of your overall financial health. Nearly three-quarters (73%) of Americans say knowing the value of their home is important for precisely this reason, according to a NerdWallet survey conducted online by The Harris Poll in August 2018.
Discover five different ways to determine the value of your home below.
1. Use online valuation tools
Searching “how much is my house worth?” online reveals dozens of home value estimators. In fact, 22% of U.S. homeowners who determined their home’s value used an online estimator, according to the survey. The technical term for these tools is automated valuation model, or AVM, and they’re typically offered by lenders or real estate sites like Zillow and Redfin.
Using public records like property transfers, deeds of ownership and tax assessments along with some mathematical modeling, these tools try to predict your home’s value based on recent sales and listing prices in the area.
“Most AVMs on real estate sites are generally for marketing and lead generation purposes,” says David Rasmussen, senior vice president of operations at Veros Real Estate Solutions. “They’re tasked with returning a value for just about every property even when data is limited. And in doing so, they water down the accuracy.”
The AVMs used by lenders and real estate professionals are different. These tools use a “confidence score” to indicate how close the AVM provider thinks an estimate is to market value. A confidence score of 90% means the estimate is within 10% of market value, for example, though each AVM has its own way of calculating confidence.
Professional-grade AVMs with confidence scores linked to accuracy are a step up from the real estate sites, Rasmussen says. But you should always talk to a local real estate expert to get more insight into any online valuation.
2. Get a comparative market analysis
When you’re ready to dive deeper into your home value, you can ask a local real estate agent for a comparative market analysis, or CMA.
Though not as detailed as a professional appraisal, a CMA provides an agent’s evaluation of the home and market to provide an estimate of value, typically for listing purposes.
Local real estate agents may provide a CMA for little or no cost, but be aware: They may do so with hopes of being hired as your selling agent.
3. Use the FHFA House Price Index Calculator
If you’re wary of AVMs but still want a quick estimate of what your home is worth, the Federal Housing Financing Agency’s house price index (HPI) calculator applies a more scientific approach.
The tool uses the “repeat sales method,” says FHFA senior economist Will Doerner. Armed with millions of mortgage transactions gathered since the 1970s, the FHFA tracks a house’s change in value from one sale to the next. Then it uses this information to estimate how values fluctuate in a given market.
“The HPI calculator is an easy way to see how much your house may have appreciated over time.”
Will Doerner, FHFA Senior Economist
Sounds great, right? Well, keep in mind the HPI calculator looks at conforming home mortgages (loans less than $548,250 and up to $822,375 in high-cost areas) and isn’t adjusted seasonally or for inflation.
Still, “if you have a conventional, conforming loan, the HPI calculator is an easy way to see how much your house may have appreciated over time,” Doerner says.
4. Hire a professional appraiser
Lenders require a home appraisal before they’ll approve a mortgage, but as a property owner, you can hire an appraiser to estimate home value at any time. More than one-fourth (28%) of U.S. homeowners determined their home’s value through an appraisal, according to the survey.
“As an appraiser, my job is to give a value based on the needs of my clients,” says Ryan Lundquist, owner of an appraisal company based in Carmichael, California. “Sometimes clients want the value for a date in the past, and other times it’s a current market value for a refinance or purchase.”
Among other things, appraisers evaluate:
- Market: The region, city and neighborhood in which a home is located.
- Property: Characteristics of the house, including improvements and the land it sits on.
- Comparable properties: Sales, listings, vacancies, cost, depreciation and other factors for similar houses in the same market.
This information is combined to create a final opinion of value for the home and delivered in an official report.
5. Evaluate comparable properties
One thing appraisals and AVMs have in common is their reliance on the recent sale value of comparable properties, often called “comps.” Well over half (56%) of U.S. homeowners estimated their home’s value by looking at comparable properties. On its face, this approach seems simplest.
Pulling comps is one way to determine market value without paying an appraiser, but use good judgment. “Just because the property next door sold doesn’t mean it’s a comp,” Lundquist says.
To choose accurate comps, you must employ an “apples to apples” approach, Lundquist says. Think about which properties would interest a buyer if yours weren’t available. Look for similar size, location, condition and upgrades.
To get started:
- Browse a site where MLS listings are displayed, to find the recent sale prices of comparable houses in your neighborhood.
- If there aren’t enough recent sales, look at listing prices, but remember they might not be realistic.
- You’ll need at least three valid comps to come up with a likely range of market value for your house.
Once you’ve chosen comparable properties, things get a little tricky. You’ll need to adjust for differences between your house and the comps, such as adding value to the comp price if it has more bedrooms than your house or subtracting value if its interior is outdated, for example. How much you add or subtract depends on conditions in your market, which can vary widely. After adjusting values, look at your highest and lowest comps. A rough estimate of your home value is somewhere in the middle.
How to Value a Startup
Several startup valuation methods are available for use by financial analysts. Below, we will discuss some popular methods used for valuing startups. Startups, in the most general sense, are new business ventures started up by an entrepreneur.
They usually tend to focus on developing unique ideas or technologies and introducing them into the market in the form of a new product or service.
Berkus Approach
The Berkus Approach, created by American venture capitalist and angel investor Dave Berkus, looks at valuing a start-up enterprise based on a detailed assessment of five key success factors: (1) Basic value, (2) Technology, (3) Execution, (4) Strategic relationships in its core market, and (5) Production and consequent sales.
A detailed assessment is carried out evaluating how much value the five key success factors in quantitative measure add up to the total value of the enterprise. Based on these numbers, the startup is valued. The Berkus Approach may sometimes also be referred to as “the Stage Development Method or the Development Stage Valuation Approach.”
Cost-to-Duplicate Approach
The Cost-to-Duplicate Approach involves taking into account all costs and expenses associated with the startup and the development of its product, including the purchase of its physical assets. All such expenses are taken into account in order to determine the startup’s fair market value based on all the expenses. The cost-to-duplicate approach comes with the following drawbacks:
- Not taking into consideration the company’s future potential by running projection statements of its future sales and growth.
- Not taking into consideration its intangible assets along with its physical assets. The argument here is that even at a startup stage, the company’s intangibles may have a lot to offer for its valuation, i.e., brand value, goodwill, patent rights (if any), and so on.
Future Valuation Multiple Approach
The Future Valuation Multiple Approach solely focuses on estimating the return on investment that the investors can expect in the near future, say five to ten years. Several projections are carried out for the said purpose, including sales projections over five years, growth projections, cost and expenditure projections, etc., and the startup is valued based on these future projections.
Market Multiple Approach
The Market Multiple Approach is one of the most popular startup valuation methods. The market multiple method works like most multiples do. Recent acquisitions on the market of a similar nature to the startup in question are taken into consideration, and a base multiple is determined based on the value of the recent acquisitions. The startup is then valued using the base market multiple.
Risk Factor Summation Approach
The Risk Factor Summation Approach values a startup by taking into quantitative consideration all risks associated with the business that can affect the return on investment. Under the risk factor summation method, an estimated initial value is calculated for the startup using any of the other methods discussed in this article.
To this initial value, the effect, whether positive or negative, of different types of business risks are taken into account, and an estimate is deducted or added to the initial value based on the effect of the risk.
After taking into consideration all kinds of risk and implementing the “risk factor summation” to the initial estimated value of the startup, the final value of the startup is determined. Some types of business risks that are taken into account are management risk, political risk, manufacturing risk, market competition risk, investment and capital accumulation risk, technological risk, and legal environment risk.
Discounted Cash Flow Approach
The Discounted Cash Flow (DCF) Method focuses on projecting the startup’s future cash flow movements. A rate of return on investment called the “discount rate,” is then estimated based on which it is determined how much the projected cash flow is worth.
Since startups are just starting out and there is a high risk associated with investing in them, a high discount rate is generally applied.
How to Value a House
Understanding the value of a house, be it one you own or one you are looking at purchasing, is vitally important. You will want to know how to value a house for insurance, understand where you sit in the negotiation process, how much equity you have, or how well your investment is doing. Knowing how to value a house helps you to gain this information.
We have compiled these seven tips on how to determine the market value of the property. Once you understand how to calculate property value, you will be best positioned to determine how to value a house for sale.
Tip 1: Have an appraisal done by a professional
We’ll get the obvious one out of the way first. The surefire way to calculate property value is by hiring a professional to evaluate your home. We’ll go into some more cost-efficient ways to determine the market value of property in the following points, but as with everything, you’ll get the best answer if you are willing to pay for it.
You will notice that an appraisal is a required step in the mortgage application process to help determine how much you can borrow, but you can hire an appraiser at any point to get you this information.
A professional appraiser can even give you a value for a date in the past if required as you may need that information for tax purposes or you can determine the current market value which is a more common request.
Appraisers will give you a property value estimate based on:
- The market in the location of the property
- The current state of the house and land including any improvements
- A comparison in sales, cost, depreciation and other relevant elements in the market for similar properties
Tip 2: Try online valuation tools
A simple search online for a ‘how much is my house worth calculator’ is a much more cost-efficient way for how to value a house for sale, however a little less exact than point one. Still, it’s a great place to start and a handy thing to do if you are considering buying a particular property as well.
Many financial institutions offer automated valuation models which take into account property transfers, tax assessments, and deeds of ownership, plus the current state of the market, recent sales and listing prices, to predict the value of a property in a particular location.
Keep in mind that businesses or financial institutions have created these tools marketing and lead generation purposes and are using limited data to provide answers which is why the accuracy isn’t as good as a professional report, but you get what you pay for.
Tip 3: Research similar properties
A great way to get a very realistic figure is to perform your own research on similar properties in the area and see what they have sold for, or what their asking price is, recently. The sale value of comparable properties is something the online tools use as well, and it is a simple way to get some good quality data.
One thing to be aware of when determining market value via this method is that the property next door may not be comparable based purely on location. You need to take into account size, condition, and any upgrades as well. For this reason, you may want to look for similar style homes or apartments in a wider radius rather than just sticking to your street or block.
The best steps to handle this yourself are:
1. Find recent sale prices of comparable houses nearby
2. Make a note of listing prices, but keep in mind these are not as realistic as sale prices
3. Three comparisons are the minimum number you’ll need for an accurate picture
4. Adjust for any significant differences between the properties; you may need to account for more bedrooms or an older interior
5. Look at the highest and lowest figures and place your property somewhere in the middle
It is important to note that all of this will only give you a ballpark figure, but it is a great place to start to get an idea on what your property is worth or to ensure that you are buying right when it comes to investments.
Tip 4: Use a comparative market analysis
To save you some time on the last point, you can speak to local real estate agents about a comparative market analysis (CMA). Once again, these will not be as detailed as a professional appraisal, but it will give you a small headstart on getting a lot of the required information yourself.
This information is handy for your selling preparation or figuring out your ballpark buying figure. The analysis is usually based on the agent’s evaluation of the market for listing purposes.
You may be able to get one of these given to you for free, but once again it is important to note it will likely be a marketing tool, and the agents are looking to impress you with how much they will be able to sell your home for, so the accuracy of these figures should not be taken as gospel.
Tip 5: Avoid these mistakes
There are some common mistakes that can be made by people who are trying to calculate property value without professional help, which should be avoided at all costs.
Keep the following points in mind during your process:
- If comparing properties that are currently on the market, remember that they have not had an agreed price so are really only listed as what the seller is wanting, and this may be an unrealistic expectation. Only compare your property to properties that have sold
- Any advice from an agent may be based on other offers on the property or a particular price that they want the property sold for
- Emotional attachment often makes people believe their home is worth more than it actually is, the same can happen with buyers who fall in love with a property, offering more than it is worth. It’s always best to leave emotion entirely to the side
- Market research should also involve going to open homes and auctions
- Brand new properties come with a higher price, so compare with older more established locations as opposed to off-the-plan developments
- Always ignore the media when the claim prices are going to plummet or skyrocket, this is not a trustworthy source of information
Tip 6: Take note of this useful data
There are plenty of ways to figure out how to value a house for sale with a range of useful information about the property market.
The following are the key pieces you’ll want to gather to ensure you have everything you need:
- Median house prices for your particular area
- Information about any new developments in the area
- The auction clearance rate which is the percentage of auctions resulting in a successful sale (including before or just after the auction)
- Discounting percentage which is the average discount below the listing price
- How many days property spends on the market
Tip 7: Do what you can to ensure a good valuation
While this final tip isn’t necessarily about how to value a house, it is an important one for getting the best result out of a valuation.
A low-ball valuation can your chances of refinancing, and there are a few things you can influence to add a few more dollars onto your figure, including:
- Ensure the home looks fantastic, spruce up the garden, repair anything that is broken, give the place a good clean and even a new paint job if you have time
- Make a note of any unseen improvements like new wiring and underfloor heating while also pointing out improvements in your area like a new playground on your street etc.
- Let the valuer know about similar sales nearby, they should, of course, know this but it doesn’t hurt to remind them, especially if they have been for high amounts
- Prepare any recent council rates notices or land tax valuations
- Let the valuer know if you are planning renovations and provide architectural or building plans
The above points will allow you to obtain the all-important information on how much your home is worth. The reason why you are gathering this information will dictate the level to which you will go to get it.
For example, if you are looking at selling or refinancing, then a professional valuation will likely be required. If however you are just curious or projecting some future plans, then the free DIY ways will suffice.
Either way, understanding the value of one of your most significant assets, is always a good thing, especially if you wish to use the property as a rental, to know how your investment is tracking.
How to Value a Company Formula
There are several standard methods used to derive the value of a business. When calculated, each one will likely result in a different valuation, so an owner wanting to sell a business should use all three formulas and then decide what price to use. The valuation methods are noted below.
Market Approach – Sales Based
Compare the company’s revenue to the sale prices of other, similar companies that have sold recently. For example, a competitor has sales of $3,000,000 and is acquired for $1,500,000. This is a 0.5x sales multiple. So, if the owner’s company has sales of $2,000,000, then the 0.5x multiple can be used to derive a market-based valuation of $1,000,000.
However, there can be some problems with this approach. First, the company that has already been sold might have had substantially different cash flows or profits; or, the acquirer might have been paying a premium for the intellectual property or other valuable assets of the acquiree.
Consequently, only use this valuation formula if the comparison company is quite similar to the owner’s company.
Market Approach – Profit Based
Compare the company’s profits to the sale prices of other, similar companies that have sold recently. For example, a competitor has profits of $100,000 and sells for $500,000. This is a 5x profit multiple.
So, if the owner’s company has profits of $300,000, then the 5x multiple can be used to derive a market-based valuation of $1,500,000. However, profits can be fudged with aggressive accounting, so it can make more sense to calculate a multiple of cash flows, rather than profits.
Income Approach
Create a forecast of the expected cash flows of the business for at least the next five years, and then derive the present value of those cash flows. This present value figure is the basis for a sale price. There can be many adjustments to the projected cash flows that can have a profound impact on the present value figure.
For example, the owner may have been paying himself more than the market rate, so the acquirer will be able to replace him with a lower-cost manager – which increases the present value of the business.
Or, the owner has not been paying enough for discretionary items, such as fixed asset replacements and maintenance, so these additional expenditures must be subtracted from the projected cash flows, resulting in a reduced present value. These types of issues can result in a significant amount of dickering over the valuation of a business.
Asset Approach
Calculate the market values of the company’s assets and liabilities. Add to these amounts the assumed value of internally-generated intangible assets, such as product branding, customer lists, copyrights, and trademarks. The sum total of these valuations is the basis for the value of the business.
In many cases, the value of the intangible assets exceeds the value of the tangible assets, which can result in a major amount of arguing between the buyer and seller over the true value of these assets.
There is no perfect valuation formula. Each one has issues, so the buyer and seller can be expected to argue over the real value of the entity. The buyer will try to lower the valuation in order to generate some value from an acquisition, while the seller has an incentive to be overly optimistic in making projections and valuing assets.
How to Value a Land
Land value is the value of a piece of property including both the value of the land itself as well as any improvements that have been made to it. This is not to be confused with site value, which is the reasonable value of the land assuming that there are no leases, mortgages or anything else present that would otherwise change the site’s value.
Land values increase when demand for land exceeds the supply of available land or if a particular piece of land has an intrinsic value greater than neighboring areas (e.g., oil can be found on the land).
Property owners use land value to determine how much to charge other parties for its use. For example, an individual who rents out several acres of farmland to ranchers for grazing cattle will determine an amount to charge by looking at the market value of the land compared to land taxes and the capitalization rate.
Land value may be determined by real estate appraisals conducted by third parties. An appraiser’s assessment can be crucial to a lender’s decisions on offering to finance a prospective buyer or refinancing for a property holder.
Appraisal of the land can include a comparison of its condition to similar real estate. This is not the same as comparative market analysis, wherein the prices of recently sold similar properties are compared.
The position and location of the land can have a direct influence on its value. For example, a remote parcel of land may have limited value because it does not have access to amenities, utilities, transportation or other resources that could make the property useful.
The value of the land might increase if the property is located near a popular destination such as a city, entertainment venue, or services that are in demand.
Land that is in a region that faces environmental risks could lose some of its value. For example, if a property is located in an area prone to flooding, mudslides, or earthquakes, those hazards might deter potential buyers from taking an interest in it.
The potential for recurring destruction would make it a challenge to maintain a safe and consistent presence on the property. Any improvements made to the property could be lost in an ensuing environmental calamity. The risk to residents and employees who may be present at such a site could outweigh any gains from using the land.
Even if the land is located in a prime place and has access to desirable resources, there could be mitigating circumstances that prevent the land from being developed or used to its fullest potential. Restrictive covenants might bar property owners from tapping into resources such as oil that is discovered there.
How to Value Stock
Every investor who wants to beat the market must master the skill of stock valuation. Essentially, stock valuation is a method of determining the intrinsic value (or theoretical value) of a stock.
The importance of valuing stocks evolves from the fact that the intrinsic value of a stock is not attached to its current price. By knowing a stock’s intrinsic value, an investor may determine whether the stock is over- or under-valued at its current market price.
Valuing stocks is an extremely complicated process that can be generally viewed as a combination of both art and science. Investors may be overwhelmed by the amount of available information that can be potentially used in valuing stocks (company’s financials, newspapers, economic reports, stock reports, etc.).
Therefore, an investor needs to be able to filter the relevant information from the unnecessary noise. Additionally, an investor should know about major stock valuation methods and the scenarios in which such methods are applicable.
Types of Stock Valuation
Stock valuation methods can be primarily categorized into two main types: absolute and relative.
1. Absolute
Absolute stock valuation relies on the company’s fundamental information. The method generally involves the analysis of various financial information that can be found in or derived from a company’s financial statements.
Many techniques of absolute stock valuation primarily investigate the company’s cash flows, dividends, and growth rates. Notable absolute stock valuation methods include the dividend discount model (DDM) and the discounted cash flow model (DCF).
2. Relative
Relative stock valuation concerns the comparison of the investment with similar companies. The relative stock valuation method deals with the calculation of the key financial ratios of similar companies and derivation of the same ratio for the target company. The best example of relative stock valuation is comparable companies analysis.
Popular Stock Valuation Methods
Below, we will briefly discuss the most popular methods of stock valuation.
1. Dividend Discount Model (DDM)
The dividend discount model is one of the basic techniques of absolute stock valuation. The DDM is based on the assumption that the company’s dividends represent the company’s cash flow to its shareholders.
Essentially, the model states that the intrinsic value of the company’s stock price equals the present value of the company’s future dividends. Note that the dividend discount model is applicable only if a company distributes dividends regularly and the distribution is stable.
2. Discounted Cash Flow Model (DCF)
The discounted cash flow model is another popular method of absolute stock valuation. Under the DCF approach, the intrinsic value of a stock is calculated by discounting the company’s free cash flows to its present value.
The main advantage of the DCF model is that it does not require any assumptions regarding the distribution of dividends. Thus, it is suitable for companies with unknown or unpredictable dividend distribution. However, the DCF model is sophisticated from a technical perspective.
3. Comparable Companies Analysis
The comparable analysis is an example of relative stock valuation. Instead of determining the intrinsic value of a stock using the company’s fundamentals, the comparable approach aims to derive a stock’s theoretical price using the price multiples of similar companies.
The most commonly used multiples include price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA). The comparable companies analysis method is one of the simplest from a technical perspective. However, the most challenging part is the determination of truly comparable companies.
How to Value a Bank
Banks and other financial services firms can be particularly challenging to value. Their financial statements are unlike those found in other industries, and once familiar concepts like working capital and operating income become confusing and difficult to define let alone calculate.
The consequence is that to value a bank requires a wholly different approach which carries its own set of potential pitfalls that the investor must be aware of.
Read Also: How to Build Business Credit
A bank’s cash flows tend to be highly volatile and related to macroeconomic factors. This makes forecasting cash flows extremely challenging and prone to mistake. Thankfully, there is an easier way. For most businesses, the balance sheet is largely affected by management assumptions and historical events.
For example, the decision between LIFO and FIFO inventory valuations can have a large impact on a business with a large inventory balance in an inflationary environment. The consequence of this is that, for non-banks, shareholders equity is a somewhat arbitrary measurement that is difficult to compare across firms of different ages, sizes and business strategies. For banks, this is not the case.
Banks use Mark-to-Market accounting, which carries most assets and liabilities at fair market value, rather than historical cost. In this manner, unrealized gains and losses are actually recognized (either via the income statement directly or through other comprehensive income on the balance sheet).
This translates into Shareholders Equity on the balance sheet that is more reflective of the net difference between the actual market value of assets and liabilities.
Since the book value of equity is more reliable than in other businesses and the statement of cash flows is highly volatile and less accurate as a metric of assessing management competence (given the greater impact of macro rather than microeconomic factors), most analysts rely on shareholders equity as a starting point for valuing banks.
This method is known as the Excess Return Model and it arrives at the value of equity as the sum of the current equity capital and the present value of expected excess returns to equity.
Finding the current equity capital is as easy as looking at the balance sheet. Finding the present value of excess returns is more challenging. Here is the equation:
Excess Return = (Projected Return on Equity – Cost of Equity) * (Beginning Equity Capital)
Projecting a bank’s future return on equity can be challenging. A logical starting point is to look at a long history of the bank’s actual returns on equity, and then making adjustments for the future.
This approach grounds the analysis in real returns that have been attained in the past (rather than committing the classic business school mistake of starting from zero and building up to returns by layering assumptions upon assumptions, resulting in projections that are orders of magnitude off of the best or worst performance ever achieved by the company, or even any company in the industry!), and then makes allowance for projected changes in the operating environment.
This is the stage where the investor takes into account the bank’s strengths and weaknesses relative to its competitors, as well as expected changes to the macroeconomic environment.
Coming up with a firm’s cost of equity usually means (to the MBA crowd at least) the Capital Asset Pricing Model, which incorporates a firm’s beta and the equity risk premium. Again, don’t let the market fool you into using an abnormally low cost of equity just because the CAPM spits one out.
If a bank is earning extremely high excess returns now, it is important to do a multi-period valuation whereby these returns decline to a long-term sustainable level over time. Once the firm reaches its long-term sustainable operating level, you calculate a terminal value that incorporates this long-run moderate growth.
The objective is to arrive at expected excess returns for each year in the future, either through a period of higher than normal growth with a terminal value, or modeling normal growth beginning now (for a relatively established bank).
There are other methods of valuing a bank. One can value the dividend stream using payout ratios (even if dividends are not currently being paid, but are expected to be forthcoming in the future), or asset liquidation values (using weighted average interest rates on the loan portfolio relative to market rates), and a plethora of relative valuation models.
It appears that the excess return model is the most common, and I think the most theoretically justifiable given its focus on absolute value and grounding in what has actually been achieved and current equity value.