Business Valuation Calculator – A Valuation Tool to Find Small & Middle-Market Companies Value

As a leading mergers & acquisitions advisor, a question we get from nearly all business owners we meet is what is my business worth? and what deal structures can I expect for my business?

Note that this free valuation calculator is meant to provide a ballpark estimate of business value for business owners. There are many qualitative risk factors and business differentiators that vary for each business. Additionally, a large portion of a companies value is in the context that it is presented. Businesses that are sold in professional auction processes will sell for as much as 30% more than those that are not. This is especially true if the bidders are strategic buyers.

Use the Business Valuation Calculator

Is the Valuation Tool Really Free?

Yes. We created the business valuation calculator to be 100% free. Depending on if you’re a fit for our services (M&A or business brokerage) or if your business is too small will determine if we follow up with you to set an appointment, or if we give you a business valuation report document.

How Business Valuations Are Determined

Like any other type of investment, businesses are worth what a buyer will pay for them. That is why if you are selling your business it is imperative to work with a business broker or M&A advisor that has experience in your industry and the ability and expertise to run a full auction process and get the business in front of hundreds of potential buyers to maximize the value of your business.

The main methodologies used to determine business valuation are precedent transactions and valuation through discounted cash flow analysis. One of the main problems with these business valuation methodologies though is that there are rarely precedent transactions that are readily available. Even if you can find records of similar businesses that have sold, the transaction terms and specific attributes of the business are rarely available.

Because of this, the most reliable way to come up with the right business value for your company is to share information with a qualified business broker (for small companies) or M&A advisor (companies $5m+ in revenue) to see what they believe the business will trade for. No business valuation calculator will be able to give you numbers as accurate as a tenured professional, nor will it be able to outline the deal structure(s) that potential buyers will offer.

Discounted Cash Flow Valuation

Discounted cash flow analysis (DCF) is the process of forecasting the future net profit of a company, applying a discount rate to those future cash flows, and discounting them to calculate their present value.

What is the Present Value of These Future Cash Flows?

In this example, you’ll see each year’s earnings increasing by 10%. A terminal value is used for the fifth year and all cash flows are discounted at 20% per year in order to find their current value.

DCF Graphic

What is a Business Valuation Multiple

In the case above, you’ll see that the DCF value of your company comes out to almost exactly the same as what a 5X multiple on cash flow would appraise it at. If an M&A advisor thought that it would be more valuable, they could increase the future growth rate, decrease the discount rate or increase the multiple they are applying to the company. All three would have the same effect.

What is EBITDA

If you’ve been in business for a while, chances are you have become familiar with the term EBITDA. This is an acronym that stands for Earnings Before Interest Taxes Depreciation and Amortization. It is the primary figure used in valuing companies on the private market.

To calculate this figure take your businesses Net profit and add back in interest paid, corporate taxes (including payroll), depreciation, and amortization. Because a new owner will recapitalize the business post-acquisition, what you pay in interest and taxes is really not indicative of what the potential buyer will be paying.

EBITDA Adjustments

Additionally, in order to accurately calculate the true level of discretionary cash flow that your company generates on an annual basis, your M&A advisor will walk you through adjusting your earnings further. This means any excess compensation that owners have taken for themselves is added back into EBITDA as well as any non-recurring expenses such as one-time legal fees. Also, some business owners will have their family members who don’t work in the business on payroll as employees. Because this is not an expense that the new owner would incur, it is added back in to the adjusted EBITDA figure.

Qualitative Risk Factors

Other risk factors that need to be addressed if you are trying to improve the valuation of your business are:

  • How much recurring revenue your business has (the more the better. This makes growth more attainable and lowers the businesses relative risk)

  • How reliant on the owners your company is

  • Size. One of the most predictable key drivers in a business’ value with larger businesses being more desirable for a potential buyer

  • Bonding, insurance and legal liability

  • Asset heavy industry vs. asset light industry (most investors prefer an asset light business)

  • Strong marketing funnel and sales team in place

  • Strong leadership team in place

  • Risk of your industry being obsolete

  • Tech enablement (if your company is high tech and differentiated from competitors, this is a benefit as it will help grow the company and lower risk)

  • Expected industry-wide growth

  • Clean financial reporting

  • Gross profit margins (over 60% for CPG and retail industries, over 30% for human capital businesses)

  • Net profit margins (the higher the better (Most service companies should be 20%+. Companies with recurring clientele can be under 20%).

What a Business Owner Can Do to Increase Their Value

In addition to addressing the key qualitative business valuation factors in the paragraph above, business owners with the ability to stay in place for a period of time post-close will garner higher valuations from buyers and typically receive better deal structure as well (higher percentage of cash paid at close).

If you are interested in doing a deep dive on your business to get our thoughts on what you could improve to see a higher exit valuation, feel free to contact us to discuss our exit prep consulting services. In addition to exit prep consulting, we can also introduce you to a number of qualified business coaches and consultants who we have had success working with.

Can I Sell My Business For The Amount The Calculator Says I’m Worth?

Not necessarily. Our business valuation calculator is as accurate as we can make it. However, the market for small businesses is inefficient, meaning that assets are not always accurately priced. Additionally, the business valuation calculator cannot understand your business and all of the qualitative risk factors that go into running it, as well as a qualified broker or business buyer can.

Additionally, if your business has fallen on hard times and is currently not profitable, the business valuation calculator will not give you a value. However, if your business has any liquid assets, it still may be sellable. In this case, your broker will apply an asset valuation methodology to your business.

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