According to the basic company evaluation formula, a business with $1 million in sales will be worth $1 million. However, if you use an advanced formula, then the company will worth between $600,000 and $1 million. The actual value of a business depends on the sales, assets, liabilities, etc.
- The main purpose of a business valuation is to determine the price of a business
- There are many reasons a business valuation is required like for selling, raising funds, attracting new investors, etc.
- For a small business, SDE multiplies is the best formula to determine the value
- For large businesses, EBITDA is the right formula to determine the value
- You can also evaluate a business using the Comps method
What does Business Valuation Mean?
According to Wikipedia –
“Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Here various valuation techniques are used by financial market participants to determine the price they are willing to pay or receive to effect a sale of the business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate the business purchase price among business assets, establish a formula for estimating the value of partners’ ownership interest for buy-sell agreements, and much other business and legal purposes such as in shareholders deadlock, divorce litigation, and estate contest.”
So, basically, business valuation helps you find the economic value of a business. You have to consider various factors while determining the value of a business, for example, current market value, assets of the business, profit of the business, future earnings of the business, and many more. If you are a business owner then you can perform business valuation frequently to make sure your business is on the right track. On the other hand, if you want to sell your business or want to buy a new business then business valuation will help you identify the right price for the business.
How to Valuate a Business?
It is very important to valuate a business properly because overvaluation or undervaluation will make it very difficult for you to determine the right price for the business while selling, buying, or looking for fundraising for your business. There are many ways you can valuate a business. In fact, there are various types of formulas available. However, while valuating your business you have to consider the below factors –
- Value of Liquidation: If you want to sell your business then what will be the price of your business
- Value of Assets: The total value of your business’s assets to the new owner
- Income Capitalization: You have to determine the future income of your business based on the current status
- Intellectual Capital: If your business has any patents or trademarks then they will increase your business’s value
- Income Multiple: You have to multiply the business income by a specific number to determine the selling price of your business
- Value of Similar Businesses: You have to check the value of other businesses similar to your business before setting the final selling price.
According to most financial experts, the ideal valuation formula is to take 3 times your gross revenue. It means if your revenue is 1.5 million then your business valuation should be (1.5 million*3) = 4.5 million. You have to keep in mind that this formula is used only for revenues. Now if you have 1 million sales in the pipeline then the investors won’t count it. This is because the sales are not guaranteed. Therefore, if you have huge sales in the pipeline then this formula won’t be the right option to valuate your business.
There is another formula that you can use to valuate a software company and that is –
$1 million per founder + $1 million per patent +$1 per active user = Total Valuation
Now if the company has three founders and they have two patent software with more than 300,000 active users then the value of that software company would be –
$3 million for 3 founders + $2 million for 2 patents +$300,000 for active users = $5,300,000.
What is the Value of a Business with $1 Million in Sales?
There are quite a few formulas you can use to valuate a business with $1 million in sales. You can use the SDE and EBITDA, EBITDA multiples, and Comps methods to find out the actual value of a business with $1 Million in sales. Here SDE stands for Seller’s Discretionary Earnings and EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. You can use the SDE to valuate a small business and EBITDA to valuate a large business. You have to use the industry-specific multiples for both the SDE method and the EBITDA method. What number you should multiply depends on industry trends and history. Now if the business with $1 Million in Sales makes 250,000 SDE or EBITDA and the industry-specific multiple is “3” then the value of the business will be 750,000 or more. Comparing the business with a similar type of business is another great way to find the value of your business. According to Brian Cairns, founder of ProStrategix Consulting –
“Try to find a business similar to yours that has been sold or received funding. Apply that multiple to your sales. Sometimes business brokers can be helpful in this, and sometimes average multiples are published. If you can’t find comps, I would suggest you consult a professional.”
Last Updated on November 5, 2022 by Magalie D.