If you are trying to quickly determine how much your business, or for that matter any business, is worth, here is an easy way of calculating it.
1. Use the last year's earnings before interest, taxes and depreciation. This is commonly known as EBITDA, which simply means earnings before interest, taxes, depreciation and amortization.
If you are not sure what the EBITDA is but you know earnings, you can begin with earnings and add back all paid in taxes, interests, and whatever was subtracted as depreciation and amortization.
If last year's figures do not represent a normal year in the business, try to adjust for a normal period. Did the business pay interests above the normal for a special reason? Did it pay taxes above what is expected as the normal in the business? Did depreciation and amortization contain one time amounts or charges?
In other words, try to arrive to an EBITDA that is very representative of a normal year. Knowing EBITDA is the first step towards finding out the value of any business.
2. Use the appropriate multiple for the industry. Multiples can be seen in several different ways. The simplest is to think of a quick way to multiply earnings to find out the value of any business.
From the seller perspective, the price is the amount needed to let those future earnings go. From the buyer perspective, the multiple is the number of years needed to wait to recover the investment.
Some businesses are worth five times EBITDA. Some other industries take that all the way to eleven. The higher the multiple is the higher the price of the business. You can use the following multiples as a starting point.
- Manufacturer: 5 - 9
- High Tech and IT: 6 - 11
- Healthcare Services: 5 - 8
- Retailer: 4 - 7
- Advertising, Media, Public Relations: 3 - 6
- Food and Beverages: 4 - 8
The obvious next step is to multiply EBITDA times the multiple to find out the value of any business. The result is the estimated price of the business.
There is a lot of analysis that can be done from this point. For example, one is why certain industries companies vary in price so much. Another is why company value changes across time. Yet another is why certain geographic locations represent more value than others. In any case all of these are valid questions that need good and thoughtful consideration.