A business valuation calculator can provide you with a quick insight into how your business is performing and what it might command for sale on the open market. Yet is this calculator really an effective replacement for getting the valuation of a company taken by an appraiser? Learn what a business valuation calculator can -- and can't -- 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 in a fiscal year. Add to your earnings the taxes paid, amortization, net profit and interest, which is sometimes referred to as EBITDA, to get the total earnings.
By adding a multiplier for your industry, the calculator can give you a range of high and low values for your business. For example, let's say your total earnings for a year were $200,000 and you have a small service business. A calculator would take your $200,000 and multiply it by the industry multiplier to generate a business value ranging from $X to $Y.
A calculator is a useful way for small business owners to get an independent and industry relevant idea of what their business is worth. However, it is no substitute for getting a company valuation from an appraiser who understands the niche you operate in.
Business Valuations vs. Valuation Calculator
Business appraisers not only can review your income and earnings and calculate the financial worth of your business, they can integrate industry specific trends and forecasts into the valuation. Since business appraisers take the time to research your business, they can add in subjective variables that would nonetheless affect your company's value if you were to sell it.
For example, if your business is growing rapidly due to changes in the industry? On the other hand, if your business is about to become extinct due to changing competition or technology, your company might be worth less.
A calculator has no way of knowing this level of information about your company. As a result, the information it gives you is only somewhat accurate. Were you to rely on the calculator alone to evaluate an offer for your company, you might settle for too low of an offer or set an unrealistically high price for your small business.
While a calculator is a useful check on your business worth, it is no substitute for the in-depth opinion of a qualified appraiser. If you would like to get a professional evaluation of your business, look for an appraiser who is credentialed by a major industry organization and can explain the appraisal process to you in plain language. Since you will naturally want to act upon the appraiser's report to sell your business or increase its value, you will need to understand the valuation and the appraiser's logic.