It's fairly easy to calculate the value of a business. Whether you're planning to sell your business, are thinking about applying for a loan, or just want to know where things stand, a simple formula gives you the facts on your business' financial health.
Find your net profit. Your net profit is your gross revenue minus all expenses.
Add your net profit to your interest. Your interest is the fixed charge for borrowing money.
Add your taxes to your net profit and interest.
Add your amortisation expenses to your net profit, taxes and interest. Your amortisation expenses are the reduction of the value of business assets by prorating their cost over a period of years.
Now you have your total earnings. Times that figure by your industry's multiple. For example, if your total earnings are £65,000 and your business is in the high tech industry, then your business is valued at £390,000 to £0.8 million.
In another example, if your total earnings are also £65,000 but your business is in the manufacturing industry, then your business is worth £357,500 to £552,500.
If you are in retail, and your earnings are again £65,000, then your business is valued at £292,500 to £487,500.
The multiple varies depending on the industry.
Multiply these numbers times your Ebitda or cash flow to get an estimate of your business's worth: Manufacturing: 5.5 to 8.5 High tech: 6 to 12 Health-care services: 5 to 9 Retail: 4.5 to 7.5 Public relations, advertising, media: 3 to 6.5 Restaurants: 4 to 8
The business valuation that's calculated is a guideline and is not fixed in stone. This is especially important when deciding to price your business for sale. Other things such as market conditions play an important role in pricing.