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Business Valuation Formula:
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The simple business valuation formula estimates a company's worth by multiplying its annual earnings by an industry-standard multiplier. This approach provides a quick, rule-of-thumb assessment commonly used for small to medium-sized businesses.
The calculator uses the earnings multiplier formula:
Where:
Explanation: The multiplier reflects industry risk, growth potential, and market conditions. Higher multipliers indicate better growth prospects and lower risk.
Details: Accurate business valuation is essential for selling a business, securing financing, partnership agreements, estate planning, and strategic decision-making.
Tips: Enter annual earnings in your local currency and select an appropriate multiplier based on your industry and business characteristics. Use conservative estimates for stable businesses and higher multiples for high-growth companies.
Q1: Why use a 3-5x earnings multiplier?
A: This range is standard for small businesses, balancing risk and return. Service businesses typically use lower multiples, while tech companies may warrant higher multiples.
Q2: What earnings figure should I use?
A: Use normalized net profit after all expenses but before owner's salary and non-recurring items. Adjust for one-time expenses or unusual revenue.
Q3: When is this formula most appropriate?
A: Best for established small businesses with stable earnings. Less suitable for startups, high-growth companies, or businesses with significant assets.
Q4: Are there limitations to this approach?
A: Yes, it doesn't account for assets, liabilities, market position, or future growth potential. Consider professional valuation for major transactions.
Q5: How do I choose the right multiplier?
A: Research industry standards, consider your business's growth rate, profitability, customer concentration, and competitive advantages.