Business Valuation Tools
Business Valuation Calculator: How Much Is Yours Worth? A business valuation calculator assists buyers and sellers in estimating a business's value. Two common valuation methods start with either annual sales or annual profits (also known as seller discretionary earnings) and apply an industry multiple. Both approaches provide a solid foundation for valuing your business.
For a comprehensive and accurate business valuation, partner with Super Deal Maker. Our expert valuation specialists provide detailed business valuations, financing assessments, and in-depth industry reports to help you maximize your payout when selling your business. Super Deal Maker is renowned for delivering precise business valuations and comprehensive industry insights, ensuring you receive the best possible return. Trust our dedicated team to guide you through the valuation process with expert knowledge and personalized service.
Calculate Your Business Value
How To Use The Business Valuation Calculator
If you’re buying a business, this calculator helps determine if you can afford the business and if it's worth the asking price. If you’re selling, the calculator provides a reality check, estimating a price that could attract potential buyers.
Business Valuation Calculator Inputs
The inputs in the calculator are fields where you add information about your business. Below is an analysis of what to include in each category.
- Industry: Select the industry to which the business belongs. If the exact industry is not listed, choose the closest match. The industry multiplier affects the final valuation.
- Last 12 Months Sales: Enter the business’s sales over the last 12 months, found on the latest income statement. Sales are the revenue generated before expenses.
- Last 12 Months Profits + Owner’s Salary: Enter the revenue minus expenses, found on the latest profit and loss statement. Include the owner’s salary in this number.
Business Valuation Calculator Outputs
The outputs are fields showing the potential business value after calculations.
- Business Value Based on Sales: The calculator multiplies annual sales by the industry multiplier to give an approximate value. For example, a law firm with R1,000,000 in sales and an industry sales multiplier of 1.03 has an approximate value of R1,030,000.
- Business Value Based on Profits + Owner’s Salary: The calculator multiplies annual profit by the industry multiplier. For example, a law firm with R400,000 in profits and an industry profit multiplier of 1.99 has an approximate value of R796,000.
Note that there will always be a discrepancy between values based on sales and profits. These numbers provide an approximate range of potential business values. For some small businesses, the profit-based number may be more accurate, especially if the business has high sales but also high operating expenses.
Valuing a Small and Medium-Sized Enterprise (SME) as a Going Concern
Understanding the value of a small and medium-sized enterprise (SME) as a going concern is crucial for business owners, investors, and stakeholders. This guide provides an overview of various valuation methods to help you assess the worth of an SME.
Income-Based Approaches
Discounted Cash Flow (DCF) Method
The DCF method projects the future cash flows of the business and discounts these cash flows back to their present value using a discount rate that reflects the riskiness of the cash flows. This method is useful for businesses with predictable and stable cash flows.
Capitalization of Earnings Method
This method determines the value of the business based on its future expected earnings. It uses a capitalization rate, which is the inverse of the discount rate, making it ideal for stable businesses with consistent earnings patterns.
Market-Based Approaches
Comparable Company Analysis (CCA)
The CCA method values the business by comparing it to similar companies that have recently been sold or are publicly traded. It relies on multiples such as Price/Earnings (P/E) and Enterprise Value/EBITDA. Finding comparable businesses in the same industry is essential for this approach.
Precedent Transactions
This method looks at the prices paid for similar businesses in recent transactions. It is useful for understanding market trends and benchmarks.
Asset-Based Approaches
Adjusted Net Asset Method
This method values the business based on the fair market value of its assets minus its liabilities. It adjusts the book values to reflect current market values and is appropriate for businesses with significant tangible assets.
Liquidation Value
This method estimates the net amount that could be realized if the business were liquidated. It is not typically used for a going concern unless there is a likelihood of liquidation.
Hybrid Approaches
Weighted Average Approach
This approach combines several valuation methods to arrive at a final value, weighting each method based on its relevance to the specific business.
Considerations for SME Valuation
- Financial Performance: Analyze historical financial statements and assess profitability, revenue trends, cost structure, and cash flow.
- Future Prospects: Project future earnings and cash flows, considering industry trends, economic conditions, and business growth potential.
- Market Conditions: Evaluate the competitive landscape and market position, and consider demand for the business's products or services.
- Management and Workforce: Assess the quality and stability of the management team and the skill level and experience of the workforce.
- Tangible and Intangible Assets: Value physical assets like property, plant, and equipment, and account for intangible assets such as intellectual property, brand value, and customer relationships.
- Liabilities: Deduct outstanding debts and obligations from the valuation.
Example: Valuation of an Event Park Business
Let's consider an example of valuing an event park business:
- Income-Based Approach (DCF Method): Project future cash flows from events, rentals, and other revenue streams. Use a discount rate reflecting the risk profile of the event industry and the specific business.
- Market-Based Approach (Comparable Company Analysis): Identify similar event parks or venues and their sale prices or market values. Apply relevant multiples to the business's financial metrics.
- Asset-Based Approach (Adjusted Net Asset Method): Appraise the value of land, buildings, equipment, and other tangible assets. Deduct any liabilities to determine net asset value.
By combining these methods and adjusting for the unique aspects of the business, a comprehensive valuation can be achieved.
Factors That Go Into A Business Valuation for South African SMEs
Key Factors Considered by Business Brokers in South Africa
The factors most brokers will take into account when assessing your business include:
- Net profit
- Growth trends
- Website traffic (if significant to your business model)
- Age of business
- Online and offline sales network
- Business model
- Niche
- Competitors
- Company assets
Using the business valuation calculator above can provide a ballpark value useful to buyers, sellers, brokers, and other parties needing a quick estimate. However, for a more detailed analysis of your business's worth, you’ll need a professional valuation, which can cost tens of thousands of rands.
Many business brokers in South Africa offer free valuations to business owners ready to sell, especially those with net cash flow above R1,000,000. These valuations consider significantly more information than most calculators, increasing their accuracy.
Tangible Assets vs Intangible Assets
While not included in our business valuation calculator, tangible and intangible assets are critical pieces of the business valuation puzzle. Tangible assets such as commercial real estate, equipment, and inventory can increase a business's value; businesses lacking these assets may have a lower value compared to their counterparts.
Some intangible assets are difficult to price, but they should be valued. A business broker or M&A expert with deal-making experience can help determine these assets' value. An accurate valuation helps set a business's price and significantly affects the financing options available to potential buyers.
Business Valuation Calculator Formula
Valuation Methods for South African SMEs
Several methods can be used to value a business. The most reliable method depends on annual revenue, available data, and other factors. Our calculator includes:
- Annual Sales Multiple Formula:
Business Valuation = Annual sales x industry multiple - Seller’s Discretionary Earnings (SDE) Multiple Formula:
SDE Valuation = (Annual profits + owner’s salary) x industry multiple
When to Consider Using a Business Valuation Expert
A business valuation expert can help sellers obtain the best price while ensuring the sales price is based on solid data. The need for an expert depends on several factors, including business size, complexity, and market conditions.
"Valuation is all about analyzing the company’s ability to produce future cash flow, combined with what the market value for their business is selling for. The short-term goal to selling a business is to increase sales and profit, but valuation is a combination of where the business is right now and where it could go."
—Jock Purtle, Founder of Business Exits
Tips for Sellers
If you’re looking to sell your business, here are our top three tips to maximize the sale price:
- Prepare for the Sale: Organize your financial records and ensure accuracy. Have documents like 2+ years of business tax returns, current P&L statements, and balance sheets ready.
- Use a Business Broker: An experienced broker can maximize your sale value. They handle administrative tasks, marketing, communications, and negotiations.
- Don’t Let Emotions Impact the Sale: Keep a professional perspective and avoid emotional decision-making. The market dictates the business value based on performance and economic conditions.
Tips for Buyers
Buying a business can be complex. Here are three tips to help you find the right business:
- Find an Industry with Potential: Choose an industry with high growth potential. This can ensure the business holds its value and may sell for a higher price in the future.
- Ask for Seller Financing: Seller financing can reduce the upfront cost and often comes at a lower interest rate than traditional loans.
- Hire a Business Broker: A good broker can access more opportunities and provide valuable services like valuation and negotiation.
Pros and Cons of Using a Business Valuation Calculator
A business valuation calculator offers a quick and simple way to estimate a business’s value, but it has limitations:
Pros:
- Quick and simple to use.
- Considers industry-specific multipliers.
- Focuses on revenue and profits.
Cons:
- Doesn’t include tangible and intangible assets.
- Not a market-based approach.
- Lacks expert analysis.
Bottom Line
Arriving at a fair price for a business involves multiple factors beyond what a business valuation calculator can provide. Use the calculator as a starting point and consider a detailed valuation method or hiring an expert for a comprehensive analysis.