The Complete Business Valuation Formula Guide: 10 Essential Methods

Introduction

Understanding the worth of a business is crucial for owners, investors, and stakeholders alike. Various valuation formulas offer unique perspectives, providing valuable insights into a company's financial health and potential. In this comprehensive guide, we explore ten essential business valuation formulas, complete with numerical examples to illustrate their application and importance.

While understanding the underlying principles of these valuation formulas is relatively straightforward, implementing them can be a daunting task for the average user, especially considering the need for accurate parameters and financial data. This is where Equitest, a comprehensive business valuation software, proves invaluable. Equitest streamlines the valuation process, providing users with the tools and calculations needed to assess a business's worth accurately. Get started now for free and unlock the power of Equitest to make informed decisions about your business's financial future. Register here to start using Equitest today.

Many different types of valuation formulas can be used to determine the worth of a business. Here are ten of the most common formulas to value a business:

Many different types of valuation formulas can be used to determine the worth of a business. Here are ten of the most common formulas to value a business:

1. Asset-Based Business Valuation Formula

• To determine the current value, apply:

Current Value = (Asset Value) / (1 – Debt Ratio)

For example, if a business has assets valued at $500,000 and liabilities at $100,000, the calculation would be: $500,000 / (1 - 0.2) = $625,000

2. Income-Based Business Valuation Formula

• The formula for income-based calculations is:

Present Value = (Annual Income / (1 + Discount Rate) ^ (1 / Number of years)

For instance, if a business generates an annual income of $200,000 and the discount rate is 10%, with a 5-year projection, the calculation would be: $200,000 / (1 + 0.10) ^ (1 / 5) = $136,542.

3. Market-Based Business Valuation Formula

• For a market-based calculation, use:

CV = (EBITDA x 1.5) – (Current Liabilities x 0.5)

Or

V = (EBITDA * 1.3) / (Revenue – COGS)

As an example, if a business's EBITDA is $300,000 and current liabilities are $50,000, the calculation would be: ($300,000 x 1.5) - ($50,000 x 0.5) = $425,000.

4. Discounted Cash Flow Business Valuation Formula

• To calculate the discounted cash flow, use:

Value = (Future Cash Flow x Discount Rate) / (1 + Discount Rate) ^ n

If a business is projected to have a future cash flow of $150,000 annually, with a discount rate of 8% over 3 years, the calculation would be: ($150,000 x 0.08) / (1 + 0.08) ^ 3 = $365,290.

5. Equity Multiplier Business Valuation Formula

• The equity multiplier is found using:

Equity Multiplier = Current Value / EBITDA

For instance, if a business has a current value of $1,000,000 and an EBITDA of $200,000, the equity multiplier would be: $1,000,000 / $200,000 = 5.

6. Book Value Business Valuation Formula

• For a book value calculation, employ:

Book Value = (Beginning of Year Assets – End of Year Assets) / (End of Year Liabilities – Beginning of Year Liabilities)

Suppose a business's beginning of year assets are $800,000, end of year assets are $900,000, beginning of year liabilities are $200,000, and end of year liabilities are $250,000, the book value would be: ($900,000 - $800,000) / ($250,000 - $200,000) = $2,000.

7. Liquidation Value Business Valuation Formula

• Calculate the liquidation value with:

Liquidation Value = Current Liabilities – Value of Assets

If a business's current liabilities are $100,000 and the value of its assets is $150,000, the liquidation value would be: $100,000 - $150,000 = -$50,000.

8. Break-Up Value Business Valuation Formula

• The break-up value is determined by:

(Asset Value + Liability Value) – Total Debt = Business Value

For example, if a business has assets worth $1,000,000, liabilities valued at $500,000, and total debt of $250,000, the break-up value would be: ($1,000,000 + $500,000) - $250,000 = $1,250,000.

9. Peer Group Analysis Business Valuation Formula

• Utilize the formula:

Value = (1/N) x SUM(Pi * Vi)

As an illustration, if there are 5 companies in the group, with market capitalizations of $2 million, $3 million, $1 million, $4 million, and $5 million respectively, the value calculation for one of the companies would be: (1/5) x ($2m + $3m + $1m + $4m + $5m) = $3,000,000.

10. Precedent Transaction Analysis Business Valuation Formula

• The precedent transaction value is calculated by:

(1 + r) ^ (t/2) – C

For instance, if the weighted average cost of capital (WACC) is 10%, the number of years until the sale is 3, and the cash flow in the last year of the projection period is $200,000, the calculation would be: (1 + 0.10) ^ (3/2) - $200,000 = $221,832.

These formulas offer valuable insights into determining the worth of a business, providing a comprehensive toolkit for business valuation professionals and stakeholders alike.

Summary

In summary, understanding and implementing various business valuation formulas are crucial for assessing the worth of a business accurately. However, navigating through these formulas can be challenging, especially without the necessary parameters and financial data. This is where Equitest comes into play. Equitest is a comprehensive business valuation software that simplifies the valuation process, providing users with the tools and calculations needed to make informed decisions about their business's financial future. With Equitest, users can streamline the valuation process and gain valuable insights into their business's worth. Get started now for free and unlock the power of Equitest by registering here.