If you own a business, it’s important to know what it’s worth through a business valuation calculation. This information is crucial for making critical business decisions like selling your business or buying out a partner.

However, many business owners spend tons of money on business valuation firms when they can leverage online business valuation calculators.

A business valuation calculator is a tool that can be used to estimate a business’s value in terms of its worth. These calculators typically ask for information about the business, such as its revenue, expenses, assets, and liabilities.

Based on these data, the calculator will produce an approximate company valuation.

In this guide, we’ll cover all you need to know about using valuation tools for your business. It will discuss the factors that business valuation calculators would consider and the pros and cons of using these calculators.

By the end of the content, you’ll have learned how to calculate business valuations and be familiar with the methods.

What is business valuation?

Business valuation involves calculating a business’s estimated worth or current value. It is used for various purposes, such as selling a business, raising capital, securing additional capital, restructuring ownership, and mergers and acquisitions.

Small businesses and multinational firms alike regularly undergo business valuations.

When figuring out how much a business is worth, an accountant or business valuator starts by gathering information about the business.

Subsequently, they select the appropriate valuation method and perform a tailored set of calculations specific to that particular business. Lastly, they give an estimate of the business’s value within a range.

Business valuation calculator

Business valuation calculators are online tools business owners can use to estimate their business’s worth. There are many free business valuation calculators available online. These calculators can be a helpful tool for getting a rough estimate of the value of your business quickly and easily.

But remember, business valuation tools do not replace professional valuation. The value of your company, as determined by these methods, may be more or lower than the actual value.

A more precise estimate of a company’s worth can be obtained through a professional valuation because it considers all the variables that impact that value.

Factors that business valuation calculator consider

Simple business valuation calculators consider different factors from one service provider to another. While many factors could be considered, here are some common factors that these calculators typically consider:

• Revenue: How much money is made each year by the company.
• Expenses: The costs incurred by the business each year
• Assets: Value of a company’s property, machinery, and stock in trade.
• Liabilities: The debts owed by the business
• Industry: The nature and scope of the business
• Size: The size of the business
• Business model: The way the business operates
• Growth potential: The potential for the business to grow in the future

Pros of using a business valuation calculator

An online business valuation calculator can come in handy for a quick estimate of a business is worth. Some advantages of using a valuation calculator include:

Quick and easy

Business valuation calculators provide a quick and easy way to estimate how much your business is worth. They will ask you normal business questions like how much money you make and spend and how many people work for you.

The calculator will produce a rough estimate of your company’s worth in response to your input.

Free

Various online valuation calculators are available without charge. A preliminary valuation of your company is possible without paying any money.

Accessible

Business valuation calculators are accessible to anyone with an internet connection. This means that you can use them anywhere in the world.

Cons of using a business valuation calculator

While there are some advantages to using valuation calculators, there are also some downsides. Some disadvantages of using an online valuation tool include the following:

Inaccurate

Business valuation calculators can be inaccurate, especially if the business is complex. This is because they focus solely on one technique of valuation, ignoring the other aspects that go into determining a company’s worth.

For example, a valuation calculator may not consider the value of the business’s assets, future prospects, or current market conditions.

Incomplete

Business valuation calculators typically do not look into all of the factors that may affect how much a business is worth. As a result, they might not provide you with an accurate assessment of your company’s worth.

Online business valuation calculators may not consider the value of the business’s intellectual property, customer relationships, or brand name.

Not a substitute for a professional valuation

Business valuation calculators should not be used as a substitute for professional valuation. A professional valuation will consider all of the factors that affect the value of your business, such as your financial performance, assets, and future prospects. They will also be able to adjust the valuation for any unique factors that apply to your business.

How to calculate business valuations

While there are many approaches and methods to business valuation, there is a standard procedure for evaluating a business.

The following steps ensure a systematic and well-documented approach to business valuation, providing businesses with valuable insights and information for decision-making purposes:

Step 1: Identify what is to be valued and why

Determine the item or interest to be valued, whether it’s shares, assets, or a partial ownership stake. Clarify the valuation’s purpose, such as estate planning or a business sale.

Step 2: Establish a definition of value and a valuation date

Define the type of value being sought, such as fair market value or investment value, and determine the relevant valuation date to ensure the use of appropriate financial information.

Step 3: understand the business

Gain a thorough understanding of the business, including its internal factors (management, staff) and external factors (industry, regulatory environment). This knowledge guides the valuation approach selection.

Step 4: understand the economy and industry

Research the industry and consider external factors impacting the business, such as industry growth, risks, and economic conditions.

Step 5: review historical results and future expectations

Analyze the historical financial performance of the business to establish a foundation for valuation. Consider how past results translate into future expectations, including revenue, expenses, and growth projections.

Step 6: complete a going concern assessment

Evaluate the company’s prospects for continuing as a “going concern” or whether it would be better served by liquidating its assets. Because of this evaluation, a certain method of value may be chosen.

Step 7: select a valuation approach

The optimal approach to value can be determined using the going-concern analysis. A going concern analysis is performed on companies with a high probability of succeeding. Businesses that have no chance of survival undergo a liquidation process.

Step 8: select a valuation method

Select the specific valuation method that aligns with the circumstances within the chosen valuation approach. Options include asset-based, market-based, and income-based methods.

Step 9: make key assumptions

Establish and record essential assumptions based on the collected data for the appraisal. Future expansion, market conditions, and market trends are all taken into account in these estimates.

Step 10: calculate the value of the business

Calculate the company’s worth using the chosen valuation approach and all relevant elements and assumptions. Typically, a range of possible values is given, along with a recommended value.

Step 11: prepare the valuation report

Compile all the steps, methodologies, and calculations into a comprehensive report. The report should document the entire valuation process, including the purpose, methods, key assumptions, and the final value or value range.

Approaches to calculate business valuation

There are many different methods for calculating business valuation, but they all fall into one of three main categories:

• Asset-based methods look at the value of the business’s assets, such as equipment, inventory, and real estate.
• The capacity to earn income is analyzed using income-based approaches. Earnings before interest, taxes, depreciation, and amortization (EBITDA) and Earnings before interest and before taxes (EBIT) are two common metrics multiplied in these calculations.
• Market-based methods look at the value of similar recently sold businesses.

1. Asset-based valuation 

The asset-based valuation approach focuses on determining the value of a business by considering its assets after settling all liabilities. This method is typically employed for operating businesses that primarily derive value from physical assets or businesses that no longer function as going concerns.

There are commonly two asset-based valuation methods: the Net Asset Method and the Liquidation Method.

Net asset valuation

The net asset valuation approach values a company according to what’s left over after paying off all its debts. This approach is popular for companies whose worth is based primarily on tangible assets like real estate or income-generating investment holdings.

Net asset value is arrived at by taking the book value of all assets and deducting their fair market value. Liabilities like loans to shareholders, debts, and accounts receivable are all written down to their current market worth. Using this method, the net asset value approximates the company’s worth.

For example, let’s consider a business that owns a building initially purchased for $500,000 but has appreciated in value to $800,000. The fair market value of the liabilities is $200,000. The company’s net worth is $800,000 – $200,000 = $600,000.

A company can be valued quickly and easily using the “net asset valuation method.” However, the strategy does not consider the company’s potential for future profits. The net asset valuation approach could be too conservative for enterprises anticipated to generate high future profits.

Liquidation valuation method

When a company can no longer be run profitably, its worth can be determined by applying the liquidation valuation approach. The projected proceeds from the sale of the assets are subtracted from the estimated liquidation costs to arrive at a valuation for the business.

The liquidation valuation method has two main approaches: forced and orderly. Forced liquidation assumes that the assets will be sold quickly, under pressure, and for a lower price. Orderly liquidation assumes that the assets will be sold over time, in a more orderly fashion, and for a higher price.

Estimating asset sales proceeds minus liquidation costs and adjusting for forced or orderly liquidation yields a business’s liquidation value.

For example, a business has assets worth $1 million and liabilities of $500,000. If the business is liquidated orderly, the proceeds from the sale of the assets would be $950,000 (after subtracting the liquidation costs).

If the company were to be liquidated, the revenues from selling its assets would be enough to cover its liabilities of $450,000.

2. Income-based valuation

Income-based valuation, often known as the earnings or cash flow technique, determines a company’s worth by projecting its future cash flow. This method works well for companies that rely heavily on intangible assets like goodwill to generate income.

The income approach to valuation uses capitalization and discounting of cash flows.

Capitalized cash flow method:

One can determine a company’s worth using a revenue-based business valuation calculator, such as the capitalized cash flow approach. A company with predictable future profits and costs is valued by this method.

The evaluator forecasts the company’s future cash flow and determines its present worth.

This method considers historical financial information, industry trends, and other factors to determine maintainable cash flows. The cash flow business valuation calculator then adjusts the cash flows to account for after-tax earnings, capital asset purchases, and working capital requirements.

In addition, the capitalization rate, which measures the business’s riskiness, is applied to sustainable cash flows. Capitalization rates shift from sector to sector and firm to company.

For example, suppose a business is projected to generate net income from $500,000 to $700,000. After adjusting for taxes and other factors, the valuator arrives at maintainable cash flows of $600,000. If the capitalization rate is 8%, then the value of the business is $750,000.

Discounted cash flow (DCF) method

The DCF model considers expected cash flows into the company in the future. The evaluator projects future cash flows by factoring in expected and unexpected changes in revenue, expenditures, and asset purchases over a given period.

The “terminal value” estimates future cash flows beyond the horizon period based on the assumption of constant growth. 

A discount rate, often the company’s risk-adjusted required rate of return, is used to determine the present value of these anticipated cash flows. DCF is more adaptable than capitalized cash flow since it considers fluctuations in revenue, expenses, and other factors.

This makes it a viable approach for determining the worth of startups or enterprises with room to develop and experience fluctuating financial performance.

Consider the case of a small but prosperous company that projects double-digit growth over the next five years, with subsequent growth rates roughly matching those of inflation.

Considerations such as revenue expansion, investment in fixed assets, and debt service are incorporated into annual cash flow projections. 

After the forecasted period, the business is assumed to remain stable, resulting in the terminal value. To estimate a company’s worth, analysts compute its value per term, and the current value of its free cash flows over the next five years.

Assumptions such a 2% growth rate and a 15% discount rate are factored into the final value.

3. Market-based valuation

The market-based valuation technique uses the present stock price to project the company’s future profitability. This technique is based on how much other comparable businesses have sold for in “arms-length” deals.

Differences between the company being valued and its comparables are accounted for through adjustments.

Public company method:

The public company method is a business valuation method that uses multiples derived from comparable public companies traded in the market. This strategy is frequently employed by profitable, well-established companies.

You must first identify a list of comparable public companies to use the public company method.

These businesses should be comparable to the one you’re valuing in terms of industry and finances. Once you have identified comparable companies, you can gather their financial information. This information is often readily available online.

Once you have gathered the financial information for comparable companies, you can calculate their financial multiples. Financial multiples are ratios that compare a company’s financial performance to market capitalization.

Some common financial multiples include the enterprise value to EBITDA multiple and the price to earnings multiple.

After calculating the financial multiples for the comparable companies, you can compare them to the financial multiples of the business you value. For instance, let’s say you are valuing a company that sells salt. You identify five comparable public companies that sell salt. 

When valuing these businesses, an average of 8.5 times EBITDA is applied. The business you are valuing has an EBITDA of $10 million. Applying the average multiple to the business’s EBITDA gives you an estimated value of $85 million.

Comparable transaction method

This method is based on the idea that the market is the best way to determine the fair value of a business. The comparable transaction approach is commonly used to determine a private company’s value by looking at previous sales of businesses in the same industry.

Finding similar deals is a prerequisite for using this technique. These transactions should involve businesses in the same industry as the company you want to value, and they should have similar financial characteristics. 

Once you have identified a list of comparable transactions, you can calculate the multiples paid in each transaction. Each company’s multiple can be determined by dividing the purchase price by its revenue or EBITDA.

After calculating the multiples for the comparable transactions, you can adjust them based on the specific characteristics of the private company you value. 

For example, if the private company is smaller or has less growth potential than the comparable businesses, you would adjust the multiples downward. Once you have adjusted the multiples, apply them to the private company’s revenue or EBITDA to get an estimated value.

Levels of Valuation Report

When obtaining a business valuation, you have three options for the level of valuation reports: Calculation Valuation, Estimate Valuation, and Comprehensive Valuation. These reports vary in complexity, detail, and level of assurance provided.

1. Calculation valuation report:

The Calculation Valuation Report is an abstract document with scant coverage of the underlying business. For this type of study, the evaluator depends heavily on the information, representations, and assumptions provided by the company’s management. 

The valuator assigns a dollar amount or range of dollar amounts to the company based on the approach used. The client should be aware of the constraints of this work, as the report will provide less certainty than others.

The Calculation Valuation Report is an affordable option for determining an organization’s worth or performing due diligence on a prospective purchase.

2. Estimate valuation report:

The Calculation Valuation Report is less thorough and reassuring than the Estimate Valuation Report. It has an average amount of information and usually requires some checking or verifying of what the evaluator has been told.

Estimate Valuation Report disclosure requirements are stricter than Calculation Valuation Report disclosure requirements. 

This type of report is often used in small business valuation calculators. In small business purchases, both parties may use this report for greater assurance than calculating valuation without paying for a thorough valuation.

3. Comprehensive valuation report:

When it comes to valuation, the utmost degree of precision and confidence can be found in the Comprehensive Valuation Report. It is typically needed when an expert witness is testifying in court, when securities are at stake, or when dealing with larger organizations.

After carefully considering all of the data, the company, the market, and other aspects, the study reaches a valuation judgment. 

The valuator diligently corroborates the provided information. This report level adheres strictly to the scope of work defined by the CICBV (Canadian Institute of Chartered Business Valuators) practice standards.

It is commonly used in litigation, the sale of larger entities, or family law cases involving substantial businesses or when court involvement is anticipated.

Summary of business valuations

Valuing a business is a tricky endeavor that can be influenced by many variables. When calculating the worth of your company, it’s crucial to think about everything listed here. If you want to sell your business, you should have it valued by a professional to make sure you’re getting a good price.

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