Business Valuation Methods: How to Estimate What Your Company Is Worth

Earnings multiple method

This method multiplies a measure of annual earnings by a factor that reflects your industry, risk and growth. It is the most common approach for small businesses.

Small businesses are often valued on seller's discretionary earnings, which adds the owner's pay and one-time costs back to profit. Multiples vary by industry and deal size, so check current comparable sales through a business-sale agent or appraiser rather than trusting a rule of thumb.

In an illustrative example, $150,000 of adjusted earnings at a 2.5 multiple gives a $375,000 estimate. A 3.0 multiple gives $450,000. The multiple is where most of the debate lies.

Asset-based method

This adds up what the business owns, subtracts what it owes and arrives at a net asset value. It suits asset-heavy or struggling companies.

Use fair market value, not book value, for equipment, inventory and property. In an illustrative example, $200,000 of assets less $60,000 of liabilities gives $140,000. This ignores the earning power of the business, so it often undervalues healthy service companies and fits a liquidation scenario. See asset-based lending for how funders view assets.

Discounted cash flow

Discounted cash flow estimates future cash flows and converts them into today's dollars using a discount rate that reflects risk.

It works best for businesses with predictable growth and good forecasts. Small changes in assumptions move the answer a lot, so it can mislead if forecasts are optimistic. Build your forecast carefully with our guide to revenue forecasting and cash flow forecasting.

Market comparison

This looks at what similar businesses recently sold for. It is only as good as the comparables you can find.

Sale agents and databases track sales by industry and size. Compare revenue, earnings, location, age and growth. Adjust for differences. Public data is limited for private companies, so treat results as a range. Our guide to determining business market value adds more detail.

What moves value up or down

Steady earnings, diverse customers, documented systems and clean books raise value. Owner dependence, customer concentration and messy records lower it.

• Raises value: recurring revenue, trained staff, clean financials, growth.
• Lowers value: owner does everything, one customer is half of sales, unpaid taxes.

Good bookkeeping helps every method. See bookkeeping tips.

Common valuation mistakes

Owners often overvalue their business by counting future potential, ignoring owner dependence or using the wrong earnings figure.

Use verified, recent earnings, not projected ones. Remove personal expenses only where you can document them. Do not value the business as if you will keep working in it for free; a buyer will need to pay a manager. Be ready for the buyer's diligence, because inflated claims can derail a deal. A neutral appraiser protects both sides and speeds negotiation.

Prepare your numbers before a valuation

Clean books shorten the process and support a higher, more defensible value.

Gather three years of tax returns, monthly profit and loss statements, a balance sheet, a list of equipment and a summary of your top customers. Reconcile bank statements to reported revenue. List any owner expenses you want added back, with documents. An appraiser or buyer who finds tidy records will trust the rest of your story.

Using value in a funding decision

Value matters when you buy, sell or bring in an investor. Most working capital decisions depend on revenue and cash flow, not valuation.

If you plan to buy a business, note that ROI Funder does not place acquisition loans; closest options are working capital for the operating needs after a purchase, and SBA loans can sometimes finance acquisitions; see how to buy a business with an SBA loan. For established businesses needing growth capital, apply with a soft credit pull.