Valuing your business is an important exercise that is necessary at many stages.
What is your business worth? Knowing how to use a business valuation calculator is an excellent way to assess.
When a Business Valuation Is Necessary
There are many reasons why a business valuation is needed, including:
- Considering buying or selling a company
- Applying for a loan
- Planning an exit strategy
- Buying insurance
- Shareholder disputes
- Estate planning
The range of possible needs means you may have to complete a business valuation many times during your ownership.
How to Value a Business
There are three basic approaches to business valuation:
- Market Approach. Several “comps” databases available can give you a likely sales price based on how your sales compare to other companies your size or in your industry. It typically is calculated as a multiple of your sales, discretionary earnings or EBITDA (earnings before interest, taxes, depreciation, and amortization). It generally does not factor in company-specific risk or reward factors.
- Assets Approach. When the business income does not support the assets under management (such as a restaurant not generating sales but with a good lease, assets, and permits), this approach can be an effective valuation tool. It can be done by simply adding up the value of all assets and subtracting all liabilities.
- Income Approach. This method typically is used when company earnings are higher than the value of company assets. It usually takes into account a broad array of considerations, including cash flow and providing a living wage for the owner.
There are many different choices for executives who need a small business calculator for business valuation. Each takes a slightly different approach to the calculation. This calculator uses an earnings multiplier approach and includes the following inputs over three fiscal years:
- The cost of goods sold
- Operating expenses
- Officer salaries
- Other expenses
Variables that Affect Business Valuation
There are different factors that can affect your business valuation. As seen in the recent post, Business Plan Calculators: The Quick Guide, many of these sites use proprietary formulas to weigh these factors.
Among the most common factors that will increase the value of your business or potential acquisition are:
- Growth potential
- The percentage of repeat sales
- The rate of repeat customers
- The business is part of an established franchise
- The company is eligible for SBA loans
- The business has existed for 10 or more years
- The industry is a high-growth sector
- Whether there are predictable drivers for new sales
- Whether sales are coming from diversified sources
- Well-defined and documented processes and systems
- The reliability and establishment of suppliers and whether there are backup suppliers in place
- Whether there have been legal cases brought against the company
- Established trademarks and copyrights approved
Valuations can also take a closer look at your revenue to determine if they are in decline, increasing, or steady.
Risks play into the valuation of a business. Among the risk factors that may shape your valuation are:
- A lack of online presence
- No employees
- Existing in a declining industry
- Having poor financial records
- Less than three years in business
It is important to note, that while there are many uses for a business valuation calculator, it can never be used to determine whether the “adequate consideration” requirement is met when employer securities are purchased or sold in a ROBS plan, like Benetrends’ Rainmaker Plan®. An independent appraisal (and a formal business valuation) is required to meet this standard.
Benetrends is a leader in business financing and support services. We pioneered the use of the Rollover as Business Start-Ups (ROBS) strategy, which allows you to use your existing 401(k) or IRA funds to finance a business purchase, start-up, or expansion. Benetrends also offers an array of business support services, including formal business valuation services. To learn more, download The Definitive Guide To 401(k)/ROBS Business Funding.