Simple Formula to determine the Value of your Business
John P. Duncan
Do you know what your business is worth?
Businesses differ, but you can follow these basic valuation guidelines.
The following guidelines are assuming you are running a very small business, such as $100,000 to $2 million in sales, with a modest level of recent and expected future growth, such as mid–single digit, and no looming major problems (such as a new competitor chopping into the market share). Finally, these multiples are based on pretax profits.
An extremely well-established and steady business with a rock-solid market position, whose continued earnings will not be dependent upon a strong management team: a multiple of 8 to 10 times current profits.
An established business with a good market position, with some competitive pressures and some swings in earnings, requiring continual management attention: a multiple of five to seven times current profits.
An established business with no significant competitive advantages, stiff competition, few hard assets, and heavy dependency upon management’s skills for success: a multiple of two to four times current profits.
A small, personal service business where the new owner will be the only, or one of the only, professional service providers a multiple of one times current profits.
What About Valuing Larger Businesses?
For larger small businesses, such as middle-market companies with sales of several million dollars up to several hundred million dollars, valuation may be more commonly thought of in terms of a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). For these companies, assuming modest growth of low to high single digits, a common fair valuation range is five to seven times EBITDA.
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