You’ve been building your business for years. You’ve brought in customers, recruited staff, survived difficult years, and celebrated successes. Maybe you sometimes think about quitting or selling. Perhaps a buyer or competitor has recently shown interest.
In all cases, sooner or later, the same question comes up: what is your company actually worth?
That is not an easy question, but fortunately not a mystery either. There are proven business valuation methods to determine the value of your company. The two most important are the EBITDA multiple method and the Discounted Cash Flow (DCF) method.
In this blog, we’ll explain both business valuation methods, show you when to use which method, and provide practical examples. As a result, you’ll know exactly where your company stands and how to calculate its true value.
Why understanding business valuation methods is important
A bid for your company is only relevant if you know whether it’s realistic. Unfortunately, many small business owners enter into conversations without insight into the real value. The result: they sell too cheaply or miss a serious opportunity.
Learning proper business valuation methods helps you stay in control. It provides you with support for negotiations and makes it clear where there is still value to be gained in your company.
Whether you want to sell, invest, or just set a strategy, knowing the value is a necessary step. In fact, mastering business valuation methods should be the foundation of any exit strategy.
Method 1: The EBITDA multiple
The most commonly used of all business valuation methods in SME practice is the EBITDA multiple. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. In other words, it represents profit before interest, taxes, depreciation and amortization.
This method assumes multiplying your EBITDA by a factor, the so-called “multiple”. This multiple varies by company, sector and situation, making it essential to understand which factors influence your specific valuation.
How is the EBITDA multiple determined?
The height of the multiple depends on several key factors:
- Size of your company Larger companies often have more stable income and less dependence on the entrepreneur. Therefore, they typically receive higher multiples in valuation calculations.
- Stability of your turnover and profit If you show stable or growing results year after year, it will be rewarded. However, fluctuations or dependency on one customer depress value significantly.
- Industry sector Sectors with high margins or growth potential (such as software or IT services) often have higher multiples than, for example, traditional construction companies or retail.
- Dependency on you as owner If you arrange everything and make decisions, a buyer will see that as a risk. Conversely, is your business transferable? Then the value rises substantially.
Practical example of the EBITDA valuation method
Let’s walk through a practical example including normalization using this business valuation method:
Suppose:
- Over the past three years, your company has had an average EBITDA of $180,000
- As an entrepreneur, you pay yourself a relatively low management fee of $40,000 per year
- In the market, a similar function would normally cost $100,000
When using business valuation methods, profit must be normalized. This means that exceptional, personal or non-market costs or benefits are adjusted so that a buyer gets a fairer picture of the structural result. In this case, your low management fee will be corrected.
Normalization of EBITDA:
- Current EBITDA: $180,000
- Market-based management fee: $100,000
- Management fee paid: $40,000
- Correction: $60,000 extra costs
- Normalized EBITDA = $180,000 − $60,000 = $120,000
You are in a stable B2B service sector, with a solid team, contractual customer loyalty and no strong dependence on yourself as a person. Based on this, a multiple of 4 to 5 is realistic.
Company value = normalized EBITDA × multiple = $120,000 × 4.5 = $540,000
Without adjusting your management fee, you would think that your company is worth $810,000 ($180,000 × 4.5), but a buyer always corrects that. Therefore, it is important to know which items in your financial statements should be normalized when using valuation methods:
- Too low or too high entrepreneurial remuneration
- One-time costs or benefits (e.g. subsidies or legal settlements)
- Private expenses through the business
- Non-market rents or salaries to family members
- One-time investments or advice costs
Method 2: Discounted Cash Flow (DCF)
The DCF method is another essential business valuation method that looks at your company’s expected future cash flows. It calculates them back to today with an interest rate (the so-called discount rate). The idea is simple: a euro now is worth more than one euro in five years.
This valuation method is especially suitable if you have a well-founded multi-annual budget and if you expect your company to grow in value.
What do you need for the DCF valuation method?
To perform an accurate DCF valuation, you’ll need:
- A realistic forecast of turnover, costs and investments (usually 5 years ahead)
- Assessment of terminal value (residual value after those 5 years)
- An appropriate interest rate (discount rate), often between 10 and 20 percent
DCF calculation example
Let’s say you expect the following free cash flows over the next five years:
- Year 1: $200,000
- Year 2: $220,000
- Year 3: $240,000
- Year 4: $260,000
- Year 5: $280,000
You’re using a 12 percent discount rate. The cash flows are discounted as follows (simplified arithmetic example):
- Year 1: $200,000 ÷ (1.12)^1 = $178,571
- Year 2: $220,000 ÷ (1.12)^2 = $175,505
- Year 3: $240,000 ÷ (1.12)^3 = $170,791
- Year 4: $260,000 ÷ (1.12)^4 = $165,137
- Year 5: $280,000 ÷ (1.12)^5 = $158,640
Total present value of cash flows = $848,644
Next, you determine the terminal value, for example by applying a growth rate to year 5. Suppose this leads to a discounted terminal value of $1,500,000.
Total company value = $848,644 + $1,500,000 = $2,348,644
This business valuation method therefore provides a forward-looking picture of value, based on expected performance rather than historical results alone.
Choosing between business valuation methods: which one is right for you?
Now that you understand both major business valuation methods, which should you use? Here’s a quick guide:
Use EBITDA multiple when:
- You have stable, predictable earnings
- You’re in an established industry with clear benchmarks
- You want a quick, straightforward valuation
- Historical performance is a good indicator of future results
Use DCF method when:
- Your company is growing rapidly
- You have detailed financial projections
- Future performance will differ significantly from the past
- You’re in a high-growth or changing industry
Many business owners actually use both business valuation methods to get a range of values. This gives you a more complete picture and stronger negotiating position.
What else influences your company valuation?
In addition to choosing the right business valuation methods, there are other factors that influence the value of your company:
- Contracts with customers or suppliers
- Staff turnover and team strength
- Intellectual property (e.g. software or brands)
- Debtors and inventories
- Pending lawsuits or risks
- The structure of your company or holding company
Business valuation is therefore always a combination of numbers and context. Moreover, you need to be able to explain that context clearly to a potential buyer.
Common mistakes when applying business valuation methods
A common mistake is that entrepreneurs estimate the value of their company based on turnover or feelings. They think: “I have a million in turnover, so it will be worth 1 million.” However, proper business valuation methods show that value isn’t about turnover, it’s about profit, continuity and transferability.
Another common mistake is waiting until it is too late. If a buyer suddenly calls or you want to quit yourself, you often have too little time to be well prepared. Starting your valuation process early gives you the advantage of making improvements before seeking buyers.
Furthermore, many owners try to use business valuation methods without normalizing their financials, leading to inflated or deflated values that buyers will immediately question. At BestBonobos, we developed a platform that helps entrepreneurs apply business valuation methods in a structured, objective and independent way. You get insight into the value of your company and see immediately where you can improve. Learn more about our approach to business sales.
Steps to start using business valuation methods today
If you want to know what your company is worth, start with these steps:
- Calculate your average EBITDA over the past 3 years
- Research which multiples are common in your industry
- Prepare a simple multi-annual budget for DCF analysis
- Normalize your results for a fair view
- Sign up for the BestBonobos beta and discover how you can easily apply business valuation methods independently
Getting started with business valuation methods
The question “What is my company worth?” is more important than many entrepreneurs think. Not only if you want to sell, but also to make good strategic decisions. The EBITDA multiple and the DCF method are both valuable business valuation methods. They show where you are and where you can go.
Understanding and applying proper business valuation methods gives you control, substantiation and clarity. Furthermore, with the right tools, you can now do it yourself rather than paying expensive consultants.
We’ll be opening the BestBonobos beta soon. Do you want to be one of the first to test our software for free? Then sign up below and discover how you can work step by step to optimally value your company using proven business valuation methods.
👉 Sign up for BestBonobos today and discover how our platform helps you with valuation, preparation and sales strategy.
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