Having an accurate grasp on how to value a small business is important for
business owners and investors alike. If the business is raising a round of financing, for
example, the pre-money valuation can have an impact on current terms and any future
fundraising efforts, because raising a “down round,” or at a lower valuation
than previously established, is a negative signal.
In the event of an acquisition, shareholders must feel comfortable selling
their portion of the company at the bid price; the acquirer must also feel comfortable
paying the asking price and the long-term value of their purchase.
Using our business valuation calculator, you’ll learn what considerations
are factored into the valuation of your business. It’s worth noting, however, that
business valuation calculations are only estimates and can be drastically different from the
price someone will actually pay.
How to Calculate Business Valuation?
There are actually multiple ways to calculate the valuation of a business, and the answers
derived from each method may differ substantially. This is what makes valuing a business
more of an art than a science.
This doesn’t mean business valuations can’t be extremely accurate, it simply
means that valuations are only arbitrary numbers until the market is willing to recognize
that value in the price.
In this article, we cover three main methods of business valuation: discounted cash flow,
book value, and comparable company analysis. Our business valuation calculator uses a
combination of discounted cash flow analysis, book value, and comparable company analysis
for a comprehensive valuation.
Business Valuation Methods
1. Discounted Cash Flow
When a business has predictable cash flow, discounting the present value of those future cash
flows can give an accurate valuation of the business.
In theory, money today is worth more than money received tomorrow because of the ability to
invest today’s money and receive interest income. The discount rate is a variable that
must take into account the investors best judgement, growth rate, current interest rate,
inflation rate, and more.
DCF Business Valuation Formula
DCF = [(CF1/1 + r)^1] + [(CF2/1 + r)^2] + [(CFn/1 + n)^n]
CFx = Cash Flow in year x
R = Discount rate
N = year
2. Book Value
A business’s book value valuation is essentially its net worth. Also known as the
asset-based method for valuing a business, the formula is quite simple:
Book Value = Assets - Liabilities
While this figure can get complicated if seller discretionary earnings (SDE), liabilities to
be assumed by the buyer, intangible assets, and other line items are added back in, this can
be a very useful valuation formula for small businesses.
3. Comparable Company Analysis
Since startups and small businesses are privately owned, they are not subject to the same
financial disclosures required of publicly traded companies.
One method of calculating the valuation of a privately held company is to determine the
average valuation multiple being applied to publicly traded companies similar to the private
company. Once the average valuation multiple is determined, it can be used to value the
For example, if the average P/E ratio (price to earnings) in related public companies is 20x,
you could discount this multiple to account for startup risk and apply this to the private
company’s earnings to calculate a fair valuation.
If available, a better metric is comparable transaction analysis, or how much have similar
private companies been acquired for. Although private market data isn’t as plentiful,
there is usually some overlap between the private company’s valuation in question and
the actual valuation of a recently purchased competitor.
This small business valuation calculator can help you estimate and better understand your
business’s valuation. The comparable results are based on real market data gathered by
EquityNet from thousands of businesses across North America.
EquityNet’s patented business analysis software, Enterprise Analyzer™, can
provide a more detailed and in-depth analysis of your business to calculate the most
accurate valuation possible.