How Do You Calculate the Value of a Business?


Quick Answer

One method of calculating the value of a small business is the Owner Benefit formula, which adding pre-tax profit, owner's salary, additional owner perks, interest and depreciation of equipment and then subtracting estimated or known future capital expenditures, such as money needed for replacing equipment in the near future, according to BizBuySell. Multiply the final sum by a number from one to three for small businesses, or greater than three for larger businesses.

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Full Answer

Seller businesses, such as consulting businesses and professional practices, typically have a multiplier of one, explains BizBuySell. Businesses in a growing industry with a strong track record, a growth in profits from year to year and more than three years of experience typically have a multiplier of three. Larger businesses may have a multiplier of four or five. The multiplier for a business is subjective, and may be dependent on the return of investment for the business or the business's annual profits.

One simple method to determine the net present value of a company is to take the current annual earnings for the business and divide this number by the current percent interest on Treasury bills, reports Entrepreneur. This method of valuation assumes the business does not grow in earnings from year to year. Another method is to simply add up all of a company's assets, which may include equipment and inventory.

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