Business Valuation Blog | Understanding Buying / Selling a Company

A business valuation calculator can provide you with quick insight into how your business is performing and what it might command for sale on the open market. Is this calculator really an effective replacement for obtaining a formal valuation of a company by a certified appraiser? Learn what a business valuation calculator can, and cannot tell you about your company's worth.

What is a Business Valuation Calculator?

A business valuation calculator is a simple tool that allows you to gauge the worth of your company by entering your total earnings, along with other variables, in a fiscal year. Add to your earnings the taxes paid, amortization, net profit, and interest, which is sometimes referred to as EBITDA, to estimate total earnings. By providing earnings data, along with an estimate of your annual growth, industry risk, marketability discounts, and related factors, the calculator can give you a range of values for your business using certain standardized formulas.

A calculator is a useful way for small business owners to get an independent idea of what their business is worth. However, it is no substitute for a business appraisal from an experienced valuation firm that understands the market you operate in.

Business Valuations vs. Valuation Calculator

Business appraisers not only review your income and earnings to calculate the financial worth of your business, they also integrate industry-specific trends and forecasts into the valuation. Since business appraisers take the time to research your business, community, and your assets, they add in subjective variables that would nonetheless affect your company's value if you were to potentially sell it.

For example, if your business is located in a rapidly gentrifying part of town where property values are on the rise and people are flocking to the neighborhood, your value may increase as the neighborhood gets more attractive. On the other hand, if your company is located in an out-of-the-way area, and business has been declining, it might be worth less.

A calculator has no way of knowing this level of information about your company. As a result, the information it provides is only accurate to a broad extent. Were you to rely on the calculator alone to evaluate your company, you might settle for too low of an offer or set an unrealistically high price for your business.

While a calculator is a useful, no-cost check on your business’s worth, it is not detailed enough to be considered a true benchmark. If you are seriously contemplating selling your business, raising capital, refinancing, expanding, or even acquiring a company, you should engage the services of a certified business appraiser. If you would like to get a professional valuation of your business, find an appraiser who is credentialed by a reputable industry organization, such as the American Society of Appraisers (ASA), or the National Association of Certified Valuators and Analysts (NACVA), who can explain the appraisal process to you. Since you will want to rely on the appraiser's report to assist with your business goals, you will need to understand the logic behind the valuation.

Business Valuation Specialists offers business appraisals for a broad range of industries. If you have been holding off getting an appraisal because you have not found someone who understands the particulars of your business, give us a call. We have the qualifications you are looking for and can provide you with an accurate appraisal that will help you decide what is right for your company.

When it comes to determining the value of a company, many people, business owners included, consider only what the balance sheet says or what their local competitor sold for recently. But is that a valid way to determine what a business is truly worth? Not by a long shot. Here's our look at how professional business appraisers calculate the valuation of a company:

Behind Assets and Liabilities: How Professionals Determine Company Value

When a professional appraiser needs to determine the value of a company, the balance sheet approach is one of the last approaches used. Why? Because most businesses are far more than simply the sum of their assets minus the total of their liabilities. There are many factors, such as goodwill and reputation, position within the market and many other aspects that can affect the outcome of business appraisals. Here are two of the most commonly-used approaches to business valuations:

Income-Focused Valuation Methods

When a business is being bought or sold, the person who is selling the business is losing future income. For this reason, many businesses are appraised using an income-focused methodology that takes that income into account when determining the final value for the business. Two different methods are used to calculate the appraised value, specifically based on whether the company's income has remained steady or has been irregular in the past:

• The discounted earnings or discounted cash flow method is used when income has been irregular or periods of growth are irregular, and is used to determine the current value of future income.
• The capitalization of earnings method projects the steady growth of the past into the future to determine the current value of that income.

Market-Focused Valuation Methods

The market-focused approach takes into consideration what similar companies have sold for in the market, but customizes the sale figure to the business being appraised. The company used for the baseline may be a similar publicly-traded company or have similar transactions, earnings or revenues to the company being appraised. Common methods used include:

• The guideline public company method, which uses the price paid for minority shareholders in a similar public company in the industry and adjusts it to the company being appraised.
• The guideline company transactions method, which compares the sale price of companies that are of similar industries, size, location and products or services offered and makes adjustments to account for the differences between the sample company and the business being appraised.
• The multiple of discretionary earning method, which adjusts the financial statements from a small company by dividing the sample company's transaction value by its discretionary earnings, which is then used as a multiple for the company being appraised.
• The gross revenue multiple method, which is similar to the discretionary earning method in that it takes the transaction value but divides it by the sample company's gross revenue to develop a multiple for use in the company being appraised. This can be a poor choice if the sample company and the company being appraised are not similar in terms of profitability.

As you can see, there is much more involved in determining the value of a company than simple bookkeeping or real estate values can provide. The best way to ensure your company is receiving a quality business appraisal is by working with a certified business valuation specialist.