What is a business valuation formula?


Quick Answer

A business valuation formula is a method of estimating the value of a business using general revenue guidelines, reports About.com. Buyers, sellers and appraisers use a number of methods to value businesses depending on the purpose of the valuation. Fixed formulas tend to be too simplistic and do not reflect hidden assets and other intangible factors that add worth to a business.

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Full Answer

One method of business valuation is fixing its fair market value, which is the actual price a knowledgeable buyer is willing to pay the seller, explains About.com. The multiples of earnings method bases the value of a business on its present and estimated earnings before taxes and interest. A business's appraised value takes stock of its physical assets, such as buildings, land and equipment, based on their condition and other factors. The investment value estimates how much an investor might receive in return on investment. The liquidation value, which courts often use in bankruptcy proceedings, prices a closed business in relation to a quick sale of its assets.

Although a valuation formula may give a crude estimation of a business's value, it ignores factors such as a knowledgeable workforce, relationships with customers and brand recognition, according to About.com. It also does not differentiate between income and cash flow. It tends to ignore overlooked assets such as inventory, barter revenue and favorable lease terms. A valuation formula provides quick results, but taking time to explore the more subtle nuances of what causes a business to succeed or fail gives a better estimate of long-term value.

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