Business Value

Calculator
------------- NET ASSETS --------------
Enter your net assets

$1,000

------------ GOODWILL------------
Enter the expected profit

$500,000

Years it will last

3
Your business could be worth:

$1,501,000

Disclaimer
This template is for general information only and is not intended to provide specific advice or
attorney, accountant or financial or tax advisor regarding your individual situation.

3
 How to calculate your business value

nly and is not intended to provide specific advice or recommendations. We suggest you consult your
dvisor regarding your individual situation.
 Calculating
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, how long would the net profit remain at this level?'

your business is poor and has few advantages, the multiplier might be 0 or 1.
siness is very successful, then perhaps 4 or 5.
Other methods of valuation

Your business can be valued using more than one method.

1. Asset-based valuation
An asset-based valuation takes stock of all the investments in your business, where all the buyer is purchasing are the assets. So there is no
goodwill or multiplier calculation. Assets include:

Fixed assets
If your business owns property, machinery, vehicles or electronic equipment, the resale value can be determined easily by researching what
similar assets are selling for.

Stock
Any stock or inventory that you hold at date of purchase.

Raw materials
Anything that you have in raw form at market value.

Work in progress
If you've partially completed work at date of sale.

2. Price earnings ratio

This valuation method uses a multiplier ratio:

Value = Earnings after tax × P/E ratio.

It’s usually used by larger listed companies where you can review their stock and earnings price.

For example, a company with a share price of $100 per share and earnings per share after tax of $20 would have a P/E ratio of 5 ($100/$20 = 5).

This P/E ratio or ‘profit multiplier’ is then multiplied by the current net profit to generate a value. This number could be anything from zero (if the
business is poor) to 20 if the business has huge potential. It’s even harder when the business is making a loss (like many start-up internet
businesses), but the future looks bright.

If you used a number such as 5, and the net profit is $100,000, then you would consider a price of $500,000 for the business (regardless of the
asset value). It represents a 20% return on your capital (if you could take the $100,000 a year profit as a dividend).

But as a buyer is buying the future, not the past, projected earnings is the best earnings figure to use, not last year's profit.

Some industries have ‘standard’ P/E ratios for valuing a business, so ask your business broker or accountant if there are industry averages you
can use.

Also, try contacting your industry association or local Chamber of Commerce for their advice on determining the most appropriate P/E ratio.
Another possible source of guidance is the financial section in newspapers that gives historic P/E ratios for listed companies.

3. Market value approach

A market valuation compares your business to similar, recently sold, businesses. This process relies on there being enough comparable businesses
to judge against.

Similar to the real estate market, business brokers will compare what other companies in the same sector as you have sold for. It gives them the
only real guide, which is what someone will pay for your business.

4. Industry expectations
In some industry sectors, buying and selling businesses is common. This has led to industry-wide rules of thumb. These rules of thumb are
dependent on factors other than profit. For example:
– Turnover for a computer maintenance business or a mail-order business.

– Number of customers for a mobile phone airtime provider.

– Number of outlets for a real estate agency business.

Buyers will work out what the business is worth to them. Take the example of a computer maintenance business with 10,000 contracts but no
profits. To one buyer, the business may be worth comparatively little. However, a larger competitor may pay $100 per contract to buy the
business. This is because it could merge the two businesses and make larger profits.

Other issues
The key source of value in a business may be something that can’t easily be measured. Putting a value on intangible assets is not easy because
that value can vary depending on the nature of the assets and the industry. Get advice from your business advisors, local Chamber of Commerce,
or industry association.

Some examples:

Strong relationships with key customers or suppliers. For example, if a business holds a license or distributorship rights across the U.S. for
a product expected to be successful, the business’s value will increase accordingly.

Management stability. If the owner–manager or other key people are going to leave, the business may be worth far less. For example, the
profitability of an advertising agency may collapse if a key creative person leaves. Similarly, if key salespeople leave, they may take important
customers with them. Any written agreements or incentives to retain key employees could add value. But they could also damage the value if a
potential buyer intends to bring in a new team.

Intellectual property ownership. If the business owns the rights to patents, copyrights or well-established trademarks, these will add value to
the purchase price of a business. For example, if you’re selling a patented invention, you can value your business higher than a similar business
selling an unprotected product.

Disclaimer
This template is for general information only and is not intended to provide specific advice or recommendations. We suggest you consult your attorney, accountant or
financial or tax advisor regarding your individual situation.