What is a business valuation?
How do you define what your business is worth?
A business valuation is an estimate of what your business could sell for today. It’s based on what the business earns, how risky or stable it is, how easy it is to run without you as the owner and what similar businesses recently have sold for.
A valuation is always a price range, not an exact number. The final sale price depends on the buyer, the deal terms, timing and how clear and credible your numbers and documents turn out to be after due diligence.
Why two similar businesses can be worth very different amounts
Even if two companies have the same revenue, buyers may value them differently because of things like:
- Profitability: how much money is left after you pay the costs to run the business
- Stability: recurring customers vs one-off sales
- Owner dependence: does the business rely on you personally every day
- Customer risk: what happens if your biggest client leaves
- Processes: are things documented, repeatable, and easy to hand over
- Team and structure: can the team keep running smoothly after a handover
- Growth potential: can a buyer grow it without taking huge risks
The 4 most common ways business are valued
- Multiple based on earnings
Buyers often first want to know your profit. Then they apply a multiple which is basically: How many years of profit a buyer is willing to pay. A simple way to think about it is:
- Higher risk or unstable market = lower multiple
- Strong, stable and easy-to-run business = higher multiple.
Most markets have pre-determined multiple ranges. Before calculating your value, you must make sure the profit is after normal running costs with a fair owners pay and no personal expenses.
- Market comparison
This compares your business to recent sales of similar companies in your industry.
This can be a useful reality check, but it’s not always easy to find truly comparable deals, especially for niche businesses.
- Asset-based
This is more a “what’s it worth on paper” approach: assets minus debts. This method is mainly used when your business has valuable equipment, inventory or property and when profit is low or inconsistent. It sets a minimum baseline, not the best deal price.
- DCF-method
Discounted Cash Flow (DCF) estimates the company value based on projected future cash flow from earnings, discounted back to today. The DCF-method is very sensitive to assumptions and is only useful for companies with predictable cash flow and planning.
- Multiple based on earnings
- Market comparison
- Asset-based
- DCF-method
How do I normalize my EBITDA?
Many small businesses have expenses that are partly personal or temporary. Or your owner’s pay fluctuates based on need or profit availability. Buyers adjust the costs to a normal and predictable situation. They may adjust for:
- A too high, or too low owners salary
- One-time legal costs
- A temporary marketing campaign
- A family member or owner payroll above or below market rate
- A company car that’s partly for personal use
- Use of personal assets
What do I need for a credible valuation?
Set up a tidy bookkeeping routine for your valuation to be more accurate. Otherwise, buyers will discount for uncertainties. Clean reporting improves trust and therefore value.
At minimum you’ll want:
- Last 3 completed fiscal years: revenue and profit
- A clear list of your main costs (rent, staff, suppliers, marketing)
- Debt and loans
- A simple overview of customers: recurring vs. one-off and the biggest clients
- Team overview: who does what?
- Notes on anything unusual in the last 3 years
Why do I need a valuation first?
It's important to be prepared
A good valuation helps you decide if selling now makes sense. It also sets a realistic asking price.
Furthermore, it provides you with an understanding of what you are selling, where risks lay and what a buyer might worry about. It also provides “value drivers” for you to work on to get the best deal when negotiating.
FAQ
Is a valuation the same as a sale price?
No. A valuation is an estimate. The sale price depends on buyer interest, deal terms, and negotiations.
Can I value my business without perfect numbers?
Yes, but it will be less precise. Buyers may also pay less if the numbers are unclear.
What usually increases value the most?
Stable profit, recurring customers, less dependence on the owner, and clear processes and documentation.
How often should I update a valuation?
If you’re exit-curious: once per year is a good start. If you’re preparing to sell, update whenever major performance or risks change.