What’s My Business Worth?
What’s my business worth? That’s the question we set out to answer for the millions of Small Business owners around the globe. But how do you respond to a question that has multiple answers depending on an abundance of inputs?
We decided to approach the problem from the angle of simplicity. In other words, we wanted to provide an answer to the question in a way that would satisfy various contexts in an easy to understand way.
We wanted to provide a value estimate for an owner’s business that would pass the sniff test whether they were looking to obtain a small business loan, raise equity capital or just track how it changed over time. The way we would accomplish this is to focus on simplicity.
Simplicity, in this case, is answering the question what a business is worth, using the least amount of inputs in the most understandable way for the end user. Also, we wanted the user to be able to see a range of value as well as how that value has changed over time.
With that in mind, we set out to build Bookvalu.
There are several best practice business valuation methodologies to choose from in the world of finance. But not all of them are explicitly catered to or will apply to a small business regardless of their size or tenure.
From Discounted Cash Flow to Liquidation Value, we looked at each method through the lens of a small business owner. The whole while asking ourselves does each approach fit the criteria of simplicity and understandability.
We ultimately settled on the EBITDA Multiples method. It is both elegantly simple and easily understood.
The EBITDA Multiples Valuation methodology uses a multiple of the Earnings of your business with Interest, Taxes, Depreciation, and Amortization added back.
So in other words, it takes the EBITDA of your business and multiplies it by an industry-specific multiple. Each Industry has a specific multiple based on factors related to that Industry. It’s typically a number such as 3 for example but can go into the double-digits in distinct industries.
The equation Bookvalu uses is –
EBITDA = Net Income + Interest Expense + Taxes + Depreciation + Amortization
The EBITDA output of your business is then multiplied by the industry multiple.
So for example, if the EBITDA of a business in the Manufacturing Industry is $100,000 and the EBITDA multiples for companies in the Manufacturing Industry is five, then EBITDA multiple Valuation for the company will be $500,000.
$100,000 x 5 = $500,000 (EBITDA x Multiple = EBITDA Multiples Valuation)
As you can see, the EBITDA multiples business valuation methodology is easy to understand and can be applied to any business regardless of size. But now that we’ve calculated what is the company is worth, how does an owner take action on this?
That’s where the range of value and valuation trending comes into play.
So why go with a range of business values rather than one number? Well, if you recall, in the introduction I stated that there are a variety of factors that go into determining what a business is worth. And at the end of the day, a business valuation is an estimate. Having a range of values allows for a margin of error that is inherent in any valuation.
With a range of values, a small business owner can have additional confidence and insight into what a potential value of their business is. In practice, this range can be used to assess an offer to purchase the company or add another data point to a loan decision.
Next, we have valuation trending. As a business grows or contracts over time, the value of the company changes too. Having visibility into how that value is changing over time can give an owner incredible insight. This insight can be used to time a sale or develop a strategy.
The combination of a range of potential values and how a companies value changes over time is potent.
When we started to build Bookvalu, we wanted to answer a question that crosses every small business owners mind at some point. We tried to respond to it in a way that would be readily understood and actionable.
If you want to know what your business is worth, why not give Bookvalu a try. Its free to get started.