How to Figure Out What Your Business Is Worth

Why value is a range, not a number

Two buyers can value the same company differently. A valuation gives a defensible range based on earnings, risk and what similar businesses sold for.

Value depends on who is buying and why. A buyer who can cut costs may pay more than one who cannot. Owners should expect a range and understand what moves it up or down.

You might need a valuation to sell, bring in a partner, buy someone out, plan an estate or support a funding request. For the main methods in more detail, read business valuation methods.

Method one: a multiple of earnings

Most small businesses are priced as a multiple of seller's discretionary earnings or EBITDA. The multiple depends on industry, growth and risk.

Start by adjusting profit: add back the owner's pay, one-time costs and personal expenses run through the business. The result is often called seller's discretionary earnings.

Illustrative example: adjusted earnings of $200,000 at a multiple of 2.5 gives a value of $500,000. At 3.0 it is $600,000. Multiples vary widely by industry and size, so use current deal data from a valuation professional rather than a rule of thumb.

Method two: asset value

Asset-based value adds up what the company owns, minus what it owes. It sets a floor for asset-heavy businesses.

List equipment, inventory, real estate and receivables at realistic market prices, then subtract liabilities. This approach suits businesses where the assets drive value, such as a trucking fleet, a manufacturer or a landlord.

It undervalues companies whose strength is people, customer relationships or reputation. Study the balance sheet, income statement and cash flow to understand the inputs.

Method three: comparable sales

Compare your business with similar ones that sold recently, adjusting for size, location and profit.

Industry databases and business sale databases track completed sales of small companies. Look at price relative to revenue and earnings in your sector. The more similar the comparison, the better the check.

Treat any single sale carefully. Terms, seller financing and what was included in the price can all change the headline number.

What raises or lowers the value

Recurring revenue, clean books, diversified customers and a team that runs without you raise value. Owner dependence and messy records lower it.

• Raises value: steady growth, contracts or repeat customers, documented processes, low customer concentration, accurate financials.
• Lowers value: the owner does everything, one customer provides most revenue, declining sales, unpaid taxes, unclear ownership of assets.

Start building value years before you plan to sell. Better records are the cheapest improvement. See spotting red flags in financial statements to learn what a buyer will notice.

Gather three years of financial statements, tax returns, a list of equipment with ages, key contracts and a summary of your top customers before you ask anyone for a valuation. Organized records shorten the work, lower the cost and let the valuator defend a higher number with evidence rather than guesses.

Using value in funding decisions

Value matters if you are buying a business or raising equity. For most working capital, lenders look at revenue and cash flow rather than appraised value.

Funding for operations is usually based on monthly revenue and bank activity. Acquisition financing and equity deals depend more on value. If you are weighing a purchase, read how to buy a business with an SBA loan.

ROI Funder does not place acquisition loans. We can help an existing business with 500+ FICO, 6+ months in operation and $20,000+ monthly revenue through working capital, term loans or an SBA loan, and we show payback math first. Our acquisition loans overview explains that product.