How Much Is My Business Worth Calculator – What is your company worth? This is an important question for any entrepreneur, business owner, employee, or potential investor – for any size company. Understanding the value of your company becomes critical as a business grows, especially if you want to raise capital, sell a part of the business, or borrow money. And, like most complex mathematical problems, understanding your company’s value depends on a variety of factors, such as vertical market and industry performance, proprietary technology or commodity, and stage of growth. When you add in the impact of technology (every company is affected by technology), it becomes quite complicated to come up with an exact equation. In this post, discover the different factors to consider when valuing your business, common equations you can use, and high-quality tools to help you do the math. How to Value a Business Company Size Profitable Market Traction and Growth Rate Sustainable Competitive Advantage Future Growth Potential 1. Company size is a commonly used factor when valuing a company. Generally, the bigger the business, the higher the value. This is because smaller companies have less market power and are more adversely affected by the loss of key leaders. In addition, larger businesses are likely to have a well-developed product or service and, as a result, more accessible capital. 2. Profitability Is your company making a profit? If so, that’s a good sign, because businesses with high profit margins will be worth more than businesses with low margins or declining profits. A key strategy for valuing your business based on profitability is to understand your sales and revenue data. Value a Company Based on Sales and Revenue Valuing a business based on sales and revenue uses your total before deducting operating expenses and multiplying that number by the industry. Your industry multiple is the average of what businesses in your industry typically sell for, so, if your multiple is two, companies typically sell for 2x their annual sales and earnings. 3. Market Traction and Growth Rate When valuing a company based on market traction and growth rate, your business is compared to your competitors. Investors want to know how big your industry’s market share is, how much control you have, and how quickly you can capture a percentage of the market. The sooner you get to market, the more valuable your business will be. 4. Sustainable Competitive Advantage What sets your product, service, or solution apart from competitors? With this approach, you need to differentiate yourself from the competition by the way you deliver value to customers. If this competitive advantage is too difficult to maintain over time, it can negatively impact the value of your business. A sustainable competitive advantage helps your business build and maintain an edge over competitors or copycats in the future, your value is higher than your competitors because you have something unique to offer. 5. Future growth potential Is your market or industry expected to grow? Or is there an opportunity to expand the business’s product line in the future? Such factors will increase the value of your business. If investors know that your business will grow in the future, the value of the company will be higher. The financial industry is built on trying to accurately predict current growth potential and future valuations. All of the above features have to be considered, but the key to understanding future value is determining which factors weigh more heavily than others. Depending on your type of business, different metrics are used to value public and private companies. Public Company Valuation For public companies, the valuation is called market capitalization (which we’ll discuss below)—where the company’s value equals the total number of shares outstanding multiplied by the share price. Public companies may also trade at book value, which is the total amount of assets minus liabilities on your company’s balance sheet. Depreciation is based on the asset’s original cost less any depreciation, amortization, or impairment charges incurred against the asset. Private Company Valuation Private companies are often difficult to value because there is little public information, a limited track record of performance, and financial results are either unavailable or not audited for accuracy. Let’s take a look at the values of companies in three stages of business development. 1. Ideation Stage In the ideation stage, startup companies have an idea, business plan, or concept of how to acquire customers, but are in the early stages of implementing a process. Without any financial results, valuation is based either on the track record of the founders or the level of innovation that potential investors see in the idea. A startup without a financial track record is valued at a negotiable amount. Most of the startups I’ve reviewed by a first-time entrepreneur start with between $1.5 and $6 million. All value is based on the expectation of future growth. If the goal is to have multiple funding rounds, maximizing your value at this stage is not always in the best interest of the entrepreneur. Valuation of early stage companies can be difficult due to these factors. 2. Proof of Concept Next is the proof of concept stage. This is when a company has a handful of employees and real operating results. At this stage, the sustainable growth rate becomes the most important factor in the assessment. Completion of business processes is proven, and comparisons are easy due to available financial information. Companies that reach this stage are valued either based on their revenue growth rate or the rest of the industry. Additional factors are comparing peer performance and how well the business is performing against its plan. Depending on the company and industry, the company will trade as a multiple of earnings or EBITDA (earnings before interest, taxes, depreciation, and amortization). 3. Proof of Business Model The third step in startup valuation is proof of business model. This is when the company has proven its concept and started scaling because it has a sustainable business model. At this point, the company has several years of actual financial results, one or more product shipments, product sales statistics, and product retention numbers. Depending on your company, there are several equations for valuing your business. Company Valuation Equations Let’s take a look at some business valuation formulas. Market Capitalization Formula Market value capitalization is a measure of a company’s value based on the stock price and shares outstanding. Here’s the formula you’ll use based on specific numbers for your business: Multiplication Method Formula You’ll use this method if you hope to value your business based on specific figures such as revenue and sales. have been. Here is the formula: Discounted Cash Flow Method Discounted cash flow (DCF) is a valuation technique based on future growth potential. This strategy predicts the return on investment in your company. This is the most complex mathematical formula on this list, as many variables are required. Here’s the formula: Picture what the source variables mean: CF = cash flow during a given year (you can add as many years as you want, just follow the same structure). r = discount rate, sometimes referred to as the weighted average cost of capital (WACC). This is the rate at which a business expects to pay off its assets. This method, along with others on this list, requires precise mathematical calculations. It can be helpful to use a calculator tool to make sure you’re on the right track. Below we’ll suggest some high-quality options. Business Valuation Calculator Below are business valuation calculators you can use to estimate the value of your companies. 1. CalcXML This calculator looks at your business’s current revenue and projected future earnings to determine value. Other business factors the calculator considers are the levels of risk involved (eg, business, financial, and industry risk) and how marketable the company is. 2. EquityNet EquityNet’s Business Valuation Calculator looks at various factors to estimate the value of your business. These factors include: Survival of the business Difficulties of the industry the business operates in Assets and liabilities Estimated future earnings Profit or loss 3. ExitAdviser ExitAdviser’s calculator uses the discounted cash flow (DCF) method to determine the value of a business. To determine the valuation, “it takes the expected future cash flows and ‘discounts’ them back to the present day.” Company Valuation Example It may be helpful to give an example of company valuation, so we’ll go over one using the market capitalization formula shown below: Shares Outstanding x Current Stock Price = Market Capitalization For this equation, I need to know the current value of my business. Stock price and number of shares outstanding. Here are some sample numbers: Shares outstanding: $250,000 Current stock price: $11 Here’s what my formula would look like when I plug the numbers in: 250,000 x 11 Based on my calculations the market value of my company is 2,750,000.
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