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How to Value a Company: 6 Methods and Examples

• 21 Apr 2017

Determining the fair market value of a company can be a complex task. There are many factors to consider, but it's an important financial skill businesses leaders need to succeed. So, how do finance professionals evaluate assets to identify one number?

Below is an exploration of some common financial terms and methods used to value businesses, and why some companies might be valued highly, despite being relatively small.

What Is Company Valuation?

Company valuation, also known as business valuation, is the process of assessing the total economic value of a business and its assets. During this process, all aspects of a business are evaluated to determine the current worth of an organization or department. The valuation process takes place for a variety of reasons, such as determining sale value and tax reporting.

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How to Valuate a Business

One way to calculate a business’s valuation is to subtract liabilities from assets. However, this simple method doesn’t always provide the full picture of a company’s value. This is why several other methods exist.

Here’s a look at six business valuation methods that provide insight into a company’s financial standing, including book value, discounted cash flow analysis, market capitalization, enterprise value, earnings, and the present value of a growing perpetuity formula.

1. Book Value

One of the most straightforward methods of valuing a company is to calculate its book value using information from its balance sheet . Due to the simplicity of this method, however, it’s notably unreliable.

To calculate book value, start by subtracting the company’s liabilities from its assets to determine owners’ equity. Then exclude any intangible assets. The figure you’re left with represents the value of any tangible assets the company owns.

As Harvard Business School Professor Mihir Desai mentions in the online course Leading with Finance , balance sheet figures can’t be equated with value due to historical cost accounting and the principle of conservatism. Relying on basic accounting metrics doesn't paint an accurate picture of a business’s true value.

2. Discounted Cash Flows

Another method of valuing a company is with discounted cash flows. This technique is highlighted in the Leading with Finance as the gold standard of valuation.

Discounted cash flow analysis is the process of estimating the value of a company or investment based on the money, or cash flows, it’s expected to generate in the future . Discounted cash flow analysis calculates the present value of future cash flows based on the discount rate and time period of analysis.

Discounted Cash Flow =

Terminal Cash Flow / (1 + Cost of Capital) # of Years in the Future

The benefit of discounted cash flow analysis is that it reflects a company’s ability to generate liquid assets. However, the challenge of this type of valuation is that its accuracy relies on the terminal value, which can vary depending on the assumptions you make about future growth and discount rates.

3. Market Capitalization

Market capitalization is one of the simplest measures of a publicly traded company's value. It’s calculated by multiplying the total number of shares by the current share price .

Market Capitalization = Share Price x Total Number of Shares

One of the shortcomings of market capitalization is that it only accounts for the value of equity, while most companies are financed by a combination of debt and equity.

In this case, debt represents investments by banks or bond investors in the future of the company; these liabilities are paid back with interest over time. Equity represents shareholders who own stock in the company and hold a claim to future profits.

Let's take a look at enterprise values—a more accurate measure of company value that takes these differing capital structures into account.

4. Enterprise Value

The enterprise value is calculated by combining a company's debt and equity and then subtracting the amount of cash not used to fund business operations.

Enterprise Value = Debt + Equity - Cash

To illustrate this, let’s take a look at three well-known car manufacturers: Tesla, Ford, and General Motors (GM).

In 2016, Tesla had a market capitalization of $50.5 billion. On top of that, its balance sheet showed liabilities of $17.5 billion. The company also had around $3.5 billion in cash in its accounts, giving Tesla an enterprise value of approximately $64.5 billion.

Ford had a market capitalization of $44.8 billion, outstanding liabilities of $208.7 billion, and a cash balance of $15.9 billion, leaving an enterprise value of approximately $237.6 billion.

Lastly, GM had a market capitalization of $51 billion, balance sheet liabilities of $177.8 billion, and a cash balance of $13 billion, leaving an enterprise value of approximately $215.8 billion.

While Tesla's market capitalization is higher than both Ford and GM, Tesla is also financed more from equity. In fact, 74 percent of Tesla’s assets have been financed with equity, while Ford and GM have capital structures that rely much more on debt. Nearly 18 percent of Ford's assets are financed with equity, and 22.3 percent of GM's.

When examining earnings, financial analysts don't like to look at the raw net income profitability of a company. It’s often manipulated in a lot of ways by the conventions of accounting, and some can even distort the true picture.

To start with, the tax policies of a country seem like a distraction from the actual success of a company. They can vary across countries or time, even if nothing actually changes in the company’s operational capabilities. Second, net income subtracts interest payments to debt holders, which can make organizations look more or less successful based solely on their capital structures. Given these considerations, both are added back to arrive at EBIT (Earnings Before Interest and Taxes), or “ operating earnings .”

In normal accounting, if a company purchases equipment or a building, it doesn't record that transaction all at once. The business instead charges itself an expense called depreciation over time. Amortization is the same thing as depreciation but for things like patents and intellectual property. In both instances, no actual money is spent on the expense.

In some ways, depreciation and amortization can make the earnings of a rapidly growing company look worse than a declining one. Behemoth brands, like Amazon and Tesla, are more susceptible to this distortion since they own several warehouses and factories that depreciate in value over time.

With an understanding of how to arrive at EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) for each company, it’s easier to explore ratios.

According to the Capital IQ database , Tesla had an Enterprise Value to EBITDA ratio of 36x. Ford's is 15x, and GM's is 6x. But what do these ratios mean?

6. Present Value of a Growing Perpetuity Formula

One way to think about these ratios is as part of the growing perpetuity equation. A growing perpetuity is a kind of financial instrument that pays out a certain amount of money each year—which also grows annually. Imagine a stipend for retirement that needs to grow every year to match inflation. The growing perpetuity equation enables you to find out today’s value for that sort of financial instrument.

The value of a growing perpetuity is calculated by dividing cash flow by the cost of capital minus the growth rate.

Value of a Growing Perpetuity = Cash Flow / (Cost of Capital - Growth Rate)

So, if someone planning to retire wanted to receive $30,000 annually, forever, with a discount rate of 10 percent and an annual growth rate of two percent to cover expected inflation, they would need $375,000—the present value of that arrangement.

What does this have to do with companies? Imagine the EBITDA of a company as a growing perpetuity paid out every year to the organization’s capital holders. If a company can be thought of as a stream of cash flows that grow annually, and you know the discount rate (which is that company’s cost of capital), you can use this equation to quickly determine the company’s enterprise value.

To do this, you’ll need some algebra to convert your ratios. For example, if you take Tesla with an enterprise to EBITDA ratio of 36x, that means the enterprise value of Tesla is 36 times higher than its EBITDA.

If you look at the growing perpetuity formula and use EBITDA as the cash flow and enterprise value as what you’re trying to solve for in this equation, then you know that whatever you’re dividing EBITDA by is going to give you an answer that is 36 times the numerator.

To find the enterprise value to EBITDA ratio, use this formula: enterprise value equals EBITDA divided by one over ratio. Plug in the enterprise value and EBITDA values to solve for the ratio.

Enterprise Value = EBITDA / (1 / Ratio)

In other words, the denominator needs to be one thirty-sixth, or 2.8 percent. If you repeat this example with Ford, you would find a denominator of one-fifteenth, or 6.7 percent. For GM, it would be one-sixth, or 16.7 percent.

Plugging it back into the original equation, the percentage is equal to the cost of capital. You could then imagine that Tesla might have a cost of capital of 20 percent and a growth rate of 17.2 percent.

The ratio doesn't tell you exactly, but one thing it does highlight is that the market believes Tesla's future growth rate will be close to its cost of capital. Tesla's first quarter sales were 69 percent higher than this time last year.

The Power of Growth

In finance, growth is powerful. It explains why a smaller company like Tesla carries a high enterprise value. The market has taken notice that, while Tesla is much smaller today than Ford or GM in total enterprise value and revenues, that may not always be the case.

If you want to advance your understanding of financial concepts like company valuation, explore our six-week online course Leading with Finance and other finance and accounting courses to discover how you can develop the intuition to make better financial decisions.

This post was updated on April 22, 2022. It was originally published on April 21, 2017.

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Here's How to Value a Company [With Examples]

Published: May 24, 2023

What's your company worth? It's an important question for any entrepreneur , business owner , or potential investor.

What's more, knowing how to value your business becomes increasingly important as it grows, especially if you want to raise capital, sell a portion of the business, or borrow money. 

Here, we'll take a look at different factors to consider when valuing your business, common equations you can use, and high-quality tools that will help you crunch the numbers.

Table of Contents

How to value a business.

Public vs. Private Valuations

Business Valuation Methods

Business Valuation Calculators

Company valuation example, what is a business valuation.

As the name suggests, a business valuation determines the value of a business or company. During the process, all areas of a business are carefully analyzed, including its financial performance, assets and liabilities, market position, and future growth potential.

Ultimately, the goal is to arrive at a fair and objective estimate which can be useful in making business decisions and negotiating.

• Company Size
• Profitability
• Market Traction and Growth Rate
• Sustainable Competitive Advantage
• Future Growth Potential

1. Company Size

Company size is a commonly used factor when valuing a company. Typically, the larger the business, the higher the valuation will be. This is because smaller companies have little market power and are more negatively impacted by the loss of key leaders. In addition, larger businesses likely have a well-developed product or service and, as a result, more accessible capital.

2. Profitability

Is your company earning a profit?

If so, this a good sign, as businesses with higher profit margins will be valued higher than those with low margins or profit loss. The primary strategy for valuing your business based on profitability is through understanding your sales and revenue data. 

Valuing a Company Based On Sales and Revenue

Valuing a business based on sales and revenue uses your totals before subtracting operating expenses and multiplying that number by an industry multiple. Your industry multiple is an average of what businesses typically sell for in your industry so, if your multiple is two, companies usually sell for 2x their annual sales and revenue.

3. Market Traction and Growth Rate

When valuing a company based on market traction and growth rate, your business is compared to your competitors. Investors want to know how large your industry market share is, how much of it you control, and how quickly you can capture a percentage of the market. The quicker you reach the market, the higher your business’ valuation will be.

4. Sustainable Competitive Advantage

What sets your product, service, or solution apart from competitors? 

With this method, the way you provide value to customers needs to differentiate you from the competition. If this competitive advantage is too difficult to maintain over time, this could negatively impact your business' valuation. 

A sustainable competitive advantage helps your business build and maintain an edge over competitors or copycats in the future, pricing you higher than your competitors because you have something unique to offer.

5. Future Growth Potential

Is your market or industry expected to grow? Or is there an opportunity to expand the business' product line in the future? Factors like these will boost the valuation of your business. If investors know your business will grow in the future, the company valuation will be higher. 

The financial industry is built on trying to accurately define current growth potential and future valuation. All the characteristics listed above have to be considered, but the key to understanding future value is determining which factors weigh more heavily than others.

Depending on your type of business, there are different metrics used to value public and private companies.

Public Versus Private Valuation

Public Company Valuation

For public companies, valuation is referred to as market capitalization (which we’ll discuss below) — where the value of the company equals the total number of outstanding shares multiplied by the price of the shares.

Public companies can also trade on book value, which is the total amount of assets minus liabilities on your company balance sheet. The value is based on the asset’s original cost less any depreciation, amortization, or impairment costs made against the asset.

Private Company Valuation

Private companies are often harder to value because there's less public information, a limited track record of performance, and financial results are either unavailable or might not be audited for accuracy.

Let's take a look at the valuations of companies in three stages of entrepreneurial growth.

1. Ideation Stage

Startups in the ideation stage are companies with an idea, a business plan, or a concept of how to gain customers, but they're in the early stages of implementing a process. Without any financial results, the valuation is based on either the track record of the founders or the level of innovation that potential investors see in the idea.

A startup without a financial track record is valued at an amount that can be negotiated. Most startups I've reviewed created by a first-time entrepreneur start with a valuation between $1.5 and $6 million.

All the value is based on the expectation of future growth. It's not always in the entrepreneur’s best interest to maximize its value at this stage if the goal is to have multiple funding rounds. The valuation of early-stage companies can be challenging due to these factors.

2. Proof of Concept

Next is the proof of concept stage. This is when a company has a handful of employees and actual operating results. At this stage, the rate of sustainable growth becomes the most crucial factor in valuation. Execution of the business process is proven, and comparisons are easier because of available financial information.

Companies that reach this stage are either valued based on their revenue growth rate or the rest of the industry. Additional factors are comparing peer performance and how well the business is executing in comparison to its plan. Depending on the company and the industry, the company will trade as a multiple of revenue or EBITDA (earnings before interest, taxed, depreciation, and amortization).

3. Proof of Business Model

The third stage of startup valuation is the proof of the business model. This is when a company has proven its concept and begins scaling because it has a sustainable business model.

At this point, the company has several years of actual financial results, one or more products shipping, statistics on how well the products are selling, and product retention numbers.

Depending on your company, there are a variety of equations to use to value your business.

Company Valuation Methods

Let’s take a look at some of the formulas for business valuation. 

Market Capitalization Formula

Market Value Capitalization is a measure of a company’s value based on stock price and shares outstanding. Here is the formula you would use based on your business’ specific numbers: 

Multiplier Method Formula

You would use this method if you’re hoping to value your business based on specific figures like revenue and sales. Here is the formula: 

Discounted Cash Flow Method

Discounted Cash Flow (DCF) is a valuation technique based on future growth potential. This strategy predicts how much return can come from an investment in your company. It is the most complicated mathematical formula on this list, as there are many variables required. Here is the formula: 

Image Source

Here are what the variables mean: 

• CF = Cash flow during a given year (can include as many years as you’d like, simply follow the same structure).
• r = discount rate, sometimes referred to as weighted average cost of capital ( WACC ). This is the rate that a business expects to pay for its assets.

This method, along with others on this list, requires accurate math calculations. To ensure you’re on the right track, it may be helpful to use a calculator tool. Below we’ll recommend some high-quality options. 

Below are business valuation calculators you can use to estimate your companies value.

This calculator looks at your business' current earnings and expected future earnings to determine a valuation. Other business elements the calculator considers are the levels of risk involved (e.g., business, financial, and industry risk) and how marketable the company is.

2. EquityNet

EquityNet's business valuation calculator looks at various factors to create an estimate of your business’s value. These factors include:

• Odds of the business' survival
• Industry the business operates in
• Assets and liabilities
• Predicted future revenue
• Estimated profit or loss

3. ExitAdviser

ExitAdviser's calculator uses the discounted cash flow (DCF) method to determine a business’s value. To determine the valuation, "it takes the expected future cash flows and ‘discounts' them back to the present day.”

It may be helpful to have an example of company valuation, so we’ll go over one using the market capitalization formula displayed below: 

Shares Outstanding x Current Stock Price = Market Capitalization

For this equation, I need to know my business’s current stock price and the number of outstanding shares. Here are some sample numbers: 

Shares Outstanding: $250,000

Current Stock Price: $11

Here is what my formula would look like when I plug in the numbers:

250,000 x 11 

Based on my calculations, my company’s market value is 2,750,000.

Back to You

Whether you’re looking to borrow money, sell a portion of your company, or simply understand your market value, understanding how much your business is worth is important for your business’ growth.

Don't forget to share this post!

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Business Valuation

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on February 26, 2024

Are You Retirement Ready?

Table of contents, what is business valuation.

Business valuation is the process of estimating the economic value of a business or its ownership interest which involves taking into account its financial performance, assets, liabilities, and other relevant factors.

Business valuation is crucial for several reasons, including providing an accurate understanding of a company's value, facilitating informed decision-making, and ensuring transparency in financial transactions like mergers and acquisitions, sales, taxation, and legal disputes.

An accurate business valuation can help business owners and investors make strategic decisions about growth, financing, and exit strategies.

Additionally, business valuation is often required for legal purposes, such as taxation, estate planning, and dispute resolution. In these cases, a thorough and accurate valuation can help ensure compliance with legal requirements and protect the interests of all parties involved.

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Taylor Kovar, CFP®

CEO & Founder

(936) 899 - 5629

[email protected]

I'm Taylor Kovar, a Certified Financial Planner (CFP), specializing in helping business owners with strategic financial planning.

In my early consulting days, I encountered a family-run bakery facing a difficult decision regarding selling their business. Their uncertainty about the value of their business was compounded by emotional attachments. By conducting a thorough cash flow analysis, we were able to identify and highlight less obvious aspects of value, such as their unique recipes and loyal customer base. Adjusting their valuation to take these intangibles into account, they were able to secure a deal that surpassed their expectations.

Contact me at (936) 899 - 5629 or [email protected] to discuss how we can achieve your financial objectives.

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Methods of Business Valuation

Asset-based approach.

The asset-based approach to business valuation focuses on determining the value of a company based on the value of its tangible and intangible assets .

This approach involves identifying and valuing the company's assets , then deducting its liabilities to arrive at the net asset value . The asset-based approach is particularly useful for companies with significant assets, as well as for those in financial distress or facing liquidation.

However, this approach has its limitations, as it does not take into account the company's future earnings potential or the value of its intangible assets, which may be significant for some businesses.

Income-Based Approach

The income-based approach to business valuation focuses on estimating the company's value based on its ability to generate future cash flows or profits .

This approach involves projecting the company's future earnings, then discounting those earnings to their present value using a discount rate that reflects the risks associated with the company's operations.

The income-based approach is often used for valuing companies with strong growth prospects or those that derive a significant portion of their value from their ability to generate future cash flows.

However, this approach relies heavily on assumptions about future earnings and can be subject to significant uncertainty and subjectivity.

Market-Based Approach

The market-based approach to business valuation estimates the value of a company by comparing it to similar businesses in the market.

This approach involves analyzing comparable companies or transactions to determine valuation multiples, such as price-to-earnings or price-to-sales ratios , which are then applied to the company being valued.

The market-based approach is useful for valuing companies in well-established industries with a large number of comparable businesses or transactions. However, it may not be suitable for companies in niche markets or industries with limited comparables.

Factors Considered in Business Valuation

Revenue and profitability.

Revenue and profitability are critical factors in determining a company's value, as they reflect the company's ability to generate income and maintain sustainable growth.

A company with consistently strong revenue and profitability is likely to be valued more highly than a company with weaker financial performance.

In business valuation, analysts typically review historical financial statements to assess a company's revenue and profitability trends, as well as to identify any anomalies or patterns that may impact the company's value.

Assets and Liabilities

A company's assets and liabilities play a significant role in its valuation , as they represent the resources available to generate income and the obligations that must be met.

Assets, both tangible and intangible, can contribute to a company's overall value, while liabilities can reduce it.

In the valuation process, analysts review a company's balance sheet to identify and value its assets and liabilities, taking into account factors such as depreciation , market conditions, and potential future growth or decline in asset values.

Cash flow is a critical factor in business valuation, as it represents the company's ability to generate cash from its operations, which can be used to fund growth, pay dividends , or meet debt obligations.

A company with strong, consistent cash flows is generally considered more valuable than a company with volatile or weak cash flows.

Analysts typically examine a company's cash flow statement to assess its cash generation and use patterns, as well as to identify any potential issues or opportunities that may impact its value.

Industry and Market Conditions

Industry and market conditions can have a significant impact on a company's value, as they influence factors such as demand for products or services, competitive dynamics, and regulatory environment.

A company operating in a growing industry with strong market demand may be valued more highly than a company in a stagnant or declining industry.

During the valuation process, analysts consider the company's industry and market conditions, as well as any trends or external factors that may influence its future performance and value.

Management and Employee Quality

The quality of a company's management and employees can also impact its value, as it influences the company's ability to execute its strategies, adapt to changes, and maintain a competitive edge.

Companies with strong, experienced management teams and skilled employees are often valued more highly than those with weaker leadership or workforce capabilities.

In business valuation, analysts may assess the company's management and employee quality through factors such as executive and employee backgrounds, turnover rates, and organizational structure .

Intellectual Property and Patents

Intellectual property (IP) and patents can significantly contribute to a company's value, particularly in industries such as technology, pharmaceuticals, or creative sectors, where innovation and unique assets are critical.

Companies with strong IP portfolios or valuable patents are often valued more highly than those with limited or less valuable IP assets.

During the valuation process, analysts may assess the value of a company's IP and patents by considering factors such as the potential future cash flows generated from those assets, the competitive advantages provided, and the remaining life of the patents.

Types of Business Valuation

Fair market value.

Fair market value is a type of business valuation that estimates the price at which a company would change hands between a willing buyer and a willing seller, with both parties having reasonable knowledge of the relevant facts and neither being under any compulsion to buy or sell.

This is often used in legal contexts, such as taxation and estate planning, as well as for setting transaction prices in business sales or acquisitions .

Investment Value

Investment value is a type of business valuation that estimates the value of a company to a specific investor, taking into account the investor's unique circumstances, objectives, and risk tolerance .

This type of valuation may differ from the fair market value, as it reflects the individual investor's perspective rather than the broader market.

Investment value is often used by investors when evaluating potential investments or determining the value of their existing holdings in a company.

Liquidation Value

Liquidation value is a type of business valuation that estimates the net amount a company would realize if it were to sell its assets and settle its liabilities immediately.

Liquidation value is typically lower than other types of valuation, as it assumes a rapid sale of assets, often at a discount to their fair market value.

This is often used in situations where a company is facing financial distress or bankruptcy and needs to quickly monetize its assets to satisfy its obligations.

Uses of Business Valuation

Sale of business.

Business valuation is essential in the sale of a business, as it provides an objective estimate of the company's worth, which can be used as a basis for negotiating the transaction price.

A thorough and accurate valuation can help business owners ensure they receive a fair price for their company and enable potential buyers to make informed decisions about the investment.

Mergers and Acquisitions

In mergers and acquisitions , business valuation plays a crucial role in determining the value of the target company and assessing the potential benefits and risks of the transaction.

A comprehensive valuation can help acquirers identify synergies, assess the target company's financial health, and determine a fair offer price.

Likewise, for the target company, a thorough valuation can help its owners understand their company's worth and negotiate favorable terms in the transaction.

Taxation and Estate Planning

Business valuation is often required for taxation and estate planning purposes, such as determining the value of a company for tax reporting, gift tax , or inheritance tax purposes.

An accurate valuation ensures compliance with tax regulations and helps business owners and their heirs plan for future tax obligations.

In estate planning , business valuation can also assist business owners in developing succession plans and strategies to preserve and transfer their company's value to future generations.

Litigation and Dispute Resolution

In litigation and dispute resolution, business valuation is often necessary to determine damages, quantify losses, or assess the value of a company in the context of legal disputes, such as shareholder disputes, divorce proceedings, or contractual disputes.

A thorough and accurate business valuation can help parties in a dispute reach a fair resolution and support their legal claims or defenses.

Business Valuation Process

Preparing for valuation.

Before beginning the business valuation process, it is essential to gather all necessary information about the company, including its financial statements , business plan, and other relevant documents.

This information will be used to analyze the company's financial performance , assets, and liabilities, as well as to assess its growth prospects and industry position.

It is also crucial to engage the services of a qualified business valuation professional or firm, who can provide an objective, expert assessment of the company's worth.

Selecting a Valuation Method

Once the necessary information has been gathered, the next step is to select the appropriate valuation method based on the company's characteristics and the purpose of the valuation.

The choice of method will depend on factors such as the company's industry, size, growth prospects, and the availability of comparable transactions or companies.

The selected valuation method should be appropriate for the company's unique circumstances and provide an accurate, objective estimate of its worth.

Collecting and Analyzing Data

After selecting a valuation method, the next step is to collect and analyze the relevant data, such as financial statements, industry reports, and market data.

This analysis will inform the valuation process by providing insights into the company's financial performance, market position, and growth prospects. The data analysis should be thorough and accurate to ensure a reliable valuation.

Applying Discounts and Premiums

In some cases, it may be necessary to apply discounts or premiums to the company's valuation to account for factors such as liquidity , marketability, or control. Discounts and premiums should be applied judiciously, based on objective criteria and supported by empirical evidence.

Finalizing Valuation Report

Once the valuation process is complete, the valuation professional or firm will prepare a comprehensive valuation report that outlines the methodology, data, and assumptions used in the valuation, as well as the final valuation result.

This report should be clear, well-organized, and supported by relevant data and analysis.

The Bottom Line

Business valuation is the process of estimating a company's worth by analyzing its financial performance, assets, liabilities, and other relevant factors. It is essential for various purposes, including sales, mergers and acquisitions, taxation, and legal disputes.

There are several methods of business valuation, including asset-based, income-based, and market-based approaches. Each method has its unique characteristics and is suitable for different situations and types of businesses.

The choice of the valuation method depends on factors such as the company's industry, size, growth prospects, and the availability of comparable transactions or companies.

Various factors are considered in business valuation, including revenue and profitability, assets and liabilities, cash flow, industry and market conditions, management and employee quality, and intellectual property and patents.

Understanding the different valuation methods, factors, and types of valuation can help business owners, investors, and other stakeholders navigate the complex world of business valuation and ensure that they have an accurate, objective assessment of a company's value.

Business Valuation FAQs

What is business valuation.

Business valuation is the process of determining the economic value of a business or company.

What are the methods used in business valuation?

There are three methods used in business valuation: asset-based approach, income-based approach, and market-based approach.

What factors are considered in business valuation?

The financial factors considered in business valuation include revenue and profitability, assets and liabilities, and cash flow. Non-financial factors include industry and market conditions, management and employee quality, and intellectual property.

What are the types of business valuation?

The three types of business valuation are fair market value, investment value, and liquidation value.

What are the uses of business valuation?

Business valuation is used for a variety of purposes, including the sale of a business, merger and acquisition, taxation and estate planning, and litigation and dispute resolution.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

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How to Value a Business: Seven Valuation Methods

By Rebecca Lake · August 01, 2023 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Business valuation refers to the process of determining the economic value of a business. There are different business valuation methods that can be used to establish a business’s worth. Understanding how to value a company can be helpful for investors and business owners, but creditors and potential buyers may need to value a company as well.

What Is a Business Valuation?

Business valuation means determining what a business is worth. Again, there are different scenarios where the valuation of a business becomes important. For instance, business owners may be interested in knowing what their business is worth if:

• They hope to sell it to a new owner

• A merger with another business is in the works

• They’re creating an employee stock purchase plan (ESPP)

• They’re working on a succession plan that includes a buy-sell agreement

• They plan to apply for loans or lines of credit using business assets as security

• They need it for tax purposes

• The business is being sued

• It’s required for the division of assets in a divorce proceeding

• Determining an IPO price

•Valuing shares in an equity crowdfunding round

Venture capitalists and angel investors may also be interested in how a company is valued if they’re planning to invest before an IPO. 💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

How Are Companies Valued?

The business valuation process involves a detailed look at the company and its key financial characteristics . A professional business appraiser or an accountant that holds an Accredited in Business Value designation (ABV) typically completes a business valuation. These professionals have specially trained in calculating the valuation of a business. There are also business valuation software programs available that you can use to estimate your company’s value yourself.

Finding the valuation of a business can involve a number of factors, including:

• Ownership structure

• Company management

• Combined value of company assets

• Combined total of company liabilities

• Cash flow

• Revenues

• Projected earnings

That’s a general explanation of how business valuation works. To understand the valuation of a company at an individual level, it helps to know more about the different business valuation methods that can be used.

7 Business Valuation Methods

There’s more than one way to approach how to value a business. The method chosen reflects the reasons for determining a business valuation in the first place. For example, the methods used for company valuation ahead of an IPO may be very different from the valuation methods used for an existing company.

It can be helpful to use multiple business valuation methods when evaluating the same business. This makes it possible to see how the numbers compare, based on different metrics. Here are some of the most common ways the valuation of a company can be determined.

1. Market Capitalization

Market capitalization is a simplified way to find the valuation of a business, based on its stock share price. To find market capitalization, you’d multiply a company’s stock share price by the number of shares outstanding.

For example, if a company has 100 million shares outstanding priced at $10 each, its market capitalization value is $1 billion. Market cap is a fluid number, as share pricing can change day to day or even hour to hour.

Investors might use a company’s market capitalization when choosing stocks to invest in. For instance, if those interested in adding large-cap companies to your portfolio then they’d look for ones that have a market valuation of $10 billion or more. On the other hand, investors interested in small-cap companies would look for those with a valuation under $2 billion.

2. Asset-Based Valuation

The asset-based valuation method determines the value of a company based on its assets . Specifically, this involves looking at a business’s balance sheet and subtracting total liabilities from total assets. For example, if a company has $10 million worth of assets and $3 million worth of liabilities, its valuation would be $7 million.

This valuation method offers a fair market value of a company or business using assets as the key metric. It’s also referred to as a book value .

Businesses can use asset-based valuation to get an estimate of current value or what the business would be valued at after a liquidation event. Using the liquidation-based approach, the business’s value is measured by any net cash remaining after all assets are sold and liabilities are paid off.

3. Discounted Cash Flow Method

The discounted cash flow method for finding a company valuation estimates the value of an asset today using projected cash flows. Business owners use this business valuation method when they expect cash flow to fluctuate in the future.

A discounted cash flow method for finding the valuation of a business includes four elements:

• Time period for analyzing cash flows

• Cash flow projections

• A discount rate, which represents a projected rate of return from a hypothetical investment

• Estimated future growth

Discounted cash flow can help businesses get a sense of what their business is worth now, based on future cash flows. This can be helpful for businesses that are considering making investments in growth and want to gauge the estimated return on that investment.

4. Earnings Multiplier Business Valuation

With the earnings multiplier method, you’re finding the valuation of a business as measured by its current share price and earnings per share (EPS) ratio. Earnings per share represents the profit per common share compared to the company’s profits as a whole.

To calculate the earnings multiplier, you divide the market value per share by the earnings per share. So if a stock is worth $10 and earnings per share are $2, the earnings multiplier would be 5. That means that it would take five years of earnings at the current rate to get to the stock price. You can compare this data point to other companies in the same industry to get a sense of how its value compares to its peers.

The earnings multiplier method can be helpful for comparing the valuation of a company to its competitors. Essentially, what it tells you is how expensive a company’s stock is relative to the earnings per share it’s reporting.

Businesses can use the earnings multiplier approach to compare a company’s current earnings to projected future earnings. This method for how to value a business may be considered to be more accurate than methods that rely on revenues or assets alone.

5. Return on Investment (ROI) Valuation Method

Return on investment refers to the return an investor can expect from placing their capital into a specific investment vehicle. In terms of business valuation methods, this option bases value on what type of ROI an investor could receive from putting money into the business.

This type of valuation method might be useful for newer businesses that are trying to attract the attention of venture capitalist or angel investors. Using the ROI method, it’s possible to provide investors with a tangible number to use as the basis for estimating what type of return they could get on their money.

The formula for ROI-based valuation is simple:

ROI = (Current value investment – Cost of investment)/ Cost of investment

Similar to market capitalization this can be a very simple way to get an estimate of a company’s value.

6. Times-Revenue Method

The times-revenue method for business valuation helps find the value of a company on a range. This method applies a multiplier to the revenues generated over a set time period. The multiplier chosen depends on the industry the company or business belongs to and/or overall market conditions.

Compared to other valuation methods, the times-revenue method is not as precise since the multiplier used may be different each time the calculations are run. It also looks at revenues, rather than profits, which may paint a truer picture of a company’s value. This method of valuation can, however, be helpful for newer businesses that aren’t generating consistent revenues or profits yet.

7. IPO Valuation Methods

Some of the business valuation methods included so far are best for established businesses that are publicly traded on an exchange. In the case of a private company that’s preparing to launch an IPO, valuation requires additional strategies, since there’s no stock price to use.

When finding the valuation of a business for an IPO, the IPO underwriting team can use several strategies, including:

• Comparing the company to similar companies

• Looking at precedent transactions, such as mergers and acquisitions

• Running financial models, including a discounted cash flow analysis

If you’re interested in IPO investing, it’s helpful to understand how an IPO’s price is set. Pricing matters because if it’s too low, the company may not realize its goals for raising capital. If it’s too high, it may put off investors. Accurate valuation and pricing also comes into play during the IPO lock-up period , in which early stage investors are prohibited from selling their shares initially. 💡 Quick Tip: Investment fees are assessed in different ways, including trading costs, account management fees, and possibly broker commissions. When you set up an investment account, be sure to get the exact breakdown of your “all-in costs” so you know what you’re paying.

The Takeaway

Knowing how to value a company matters if you own a business but it can be just as important for retail investors. If you’re a value investor, for instance, your strategy may revolve around finding the hidden gem companies, undervalued by the market as a whole.

Investing is, in many ways, all about value. Again, that’s what makes business valuation so critical to investors and business owners alike. In fact, as an investor, you are a business owner – remember to keep that in mind. And knowing how businesses are valued can help further your understanding of the markets at large.

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7 Business Valuation Methods

Whether you’re thinking of selling your business or you’re looking for new investors, there may come a time where you need to evaluate the economic worth of your business—in other words, when you need a business valuation.

As you might imagine, determining the value of a business isn’t simple—it requires accounting for a number of factors within your business finances . Because this process is so complex, many business owners choose to work with a professional to receive an objective, thorough evaluation of what their business is worth.

This being said, if you need to determine the value of your business, it’s worth understanding how this process works—even if you ultimately decide to hire a professional. In this guide, therefore, we’ll break down the seven most common business valuation methods, how they work, and how each approach may (or may not) be beneficial to your small business.

What Is Business Valuation?

At the most basic level, business valuation is the process by which the economic worth of a company is determined.

As we mentioned, there are different approaches to evaluating the value of a small business, but generally, each method will involve a full and objective assessment of every piece of your company. This being said, business valuation calculations typically include  the worth of your equipment, inventory, property, liquid assets, and anything else of economic value that your company owns. Other factors that might come into play are your management structure, projected earnings, share price, revenue, and more.

Why Would You Need a Business Valuation?

Due to the complexity of the business valuation process, these calculations are probably not something you’ll be doing every day—so, when  would you need a business valuation?

Overall, there are a handful of common reasons why business owners need to evaluate the worth of their company:

• When looking to sell your business
• When looking to merge or acquire another company
• When looking for business financing or investors
• When establishing partner ownership percentages
• When adding shareholders
• For divorce proceedings
• For certain tax purposes

Ultimately, different small business valuation methods will be preferable in different scenarios. Generally, the best approach will depend on why the valuation is needed, the size of your business, your industry, and other factors.

As an example, in a sale scenario,  the majority of private small businesses are sold as asset sales, whereas the majority of middle-market transactions involve the sale of equity—each of these sales would require a different business valuation method. 

With all of this in mind, let’s explore some of the most common business valuation methods. Once again, depending on your specific situation, one approach may be more beneficial than another; however, you’ll generally want to work with a business appraisal professional to get the most objective assessment of what your company is worth.

1. Market Value Valuation Method

First, the  market value business valuation formula is perhaps the most subjective approach to measuring a business’s worth. This method determines the value of your business by comparing it to similar businesses that have sold.

Of course, this method only works for businesses that can access sufficient market data on their competitors. In this way, the market value method is a particularly challenging approach for sole proprietors , for instance, because it’s difficult to find comparative data on the sale of similar businesses (as sole proprietorships are individually owned).

This being said, because this  small business valuation method is relatively imprecise, your business’s worth will ultimately be based on negotiation, especially if you’re selling your business or seeking an investor. Although you may be able to convince a buyer of your business’s worth based on immeasurable factors, it’s unlikely that this approach will be particularly useful for gaining investors .

Nevertheless, this  valuation method is a good preliminary approach to gain an understanding of what your business might be worth, but you’ll likely want to bring another, more calculated approach to the negotiation table.

2. Asset-Based Valuation Method

Next, you might use an asset-based business valuation method to determine what your company is worth. As the name suggests,  this type of approach considers your business’s total net asset value, minus the value of its total liabilities, according to your balance sheet.

There are two main ways to approach asset-based business valuation methods:

Going Concern

Businesses that plan to continue operating (i.e., not be liquidated) and not immediately sell any of their assets should use the going-concern approach to asset-based business valuation. This formula takes into account the business’s current total equity—in other words, your assets minus liabilities .

Liquidation Value

On the other hand, the liquidation value asset-based approach to valuation is based on the assumption that the business is finished and its assets will be liquidated. In this case, the value is based on the net cash that would exist if the business was terminated and the assets were sold. With this approach, the value  of a business’s assets will likely be lower than usual—as liquidation value often amounts to much less than fair market value.

Ultimately, the liquidation value asset-based method operates with a sort of urgency that other formulas don’t necessarily take into account.

3. ROI-Based Valuation Method

An ROI-based business valuation method evaluates the value of your company based on your company’s profit and what kind of  return on investment  (ROI) an investor could potentially receive for buying into your business.

Here’s an example: If you’re pitching your business to a group of investors to get equity financing, they’ll start with a valuation percentage of 100%. If you’re asking for $250,000 in exchange for 25% of your business, then you’re using the ROI-based method to determine the value of your business as you present this offer to the investors. To explain, if you divide the amount by the percentage offered, so $250,000 divided by 0.25, you receive your quick business valuation—in this case, $1 million.

From a practical standpoint, the ROI-method makes sense—an investor wants to know what their return on investment will look like before they invest. This being said, however, a “good” ROI  ultimately depends on the market, which is why business valuation is so subjective.

Plus, with this approach, you’ll often need more information to convince an investor or buyer of the result. An investor or buyer will want to know:

• How long will it take to recover my original investment?
• After that, when I look at my share of the expected net income, compared with my investment, what does my return look like?
• Is that number realistic? Ambitious? Conservative?
• Does it make me want to invest in this company?

All of these questions will inform an ROI-based business valuation.

To learn more about this method, watch the short video below.

4. Discounted Cash Flow (DCF) Valuation Method

Although the three business valuation methods above are sometimes considered the most common, they’re not the only options out there. In fact, whereas the ROI-based and market value-based methods are extremely subjective, some alternate approaches (as we’ll discuss) use more of your business’s financial data to get a better evaluation of its worth.

The discounted cash flow valuation method, also known as the income approach, for example,  values a business based on its projected cash flow , adjusted (or discounted) to its present value.

The DCF method can be particularly useful if your profits are not expected to remain consistent in the future. As you’ll see in the CFI business valuation example below, however, the DCF method requires significant detail and careful calculations: [1]

This spreadsheet shows the DCF method in use to evaluate the value of a business. Image source: CFI

5.  Capitalization of Earnings Valuation Method

Next, the capitalization of earnings valuation method calculates a business’s future profitability based on its cash flow, annual ROI, and expected value.

This approach, unlike the DCF method, works best for stable businesses, as the formula assumes that calculations for a single time period will continue. In this way, this method bases a business’s current value on its ability to be profitable in the future.

6. Multiples of Earnings Valuation Method

Similar to the capitalization of earnings valuation method, the multiple of earnings valuation method also determines a business’s value by its potential to earn in the future.

This being said, however, this small business valuation method, also known as the time revenue method, calculates a business’s  maximum worth by assigning a multiplier to its current revenue. Multipliers vary according to industry, economic climate, and other factors.

7. Book Value Valuation Method

Finally, the book value method calculates the value of your business at a given moment in time by looking at your balance sheet .

With this approach, your balance sheet is used to calculate the value of your equity— or total assets minus total liabilities—and this value represents your business’s worth. 

The book value approach may be particularly useful if your business has low profits, but valuable assets.

Finding a Business Valuation Professional

Although understanding the different business valuation methods is important, if you do need to evaluate the worth of your business, it’s best to work with a professional. Although the approaches may seem simple enough on the surface, as we saw with the DCF example above, there are extensive and complex calculations involved in determining the value of a business.

This being said, not only will a professional be able to offer you an objective examination of your business, but they’ll likely be able to combine multiple business valuation methods to get you the most thorough sense of what your business is worth.

Therefore, if you need a business valuation professional, you’ll want to know where to find one. Generally, you’ll want to look for an individual who is a certified business valuation professional. The American Society of Appraisers ( ASA ) offers this certification, as does the American Institute of CPAs ( AICPA ). You might use either of these organizations as a resource for finding an appraiser to perform your business valuation. You also might consult your CPA or business accountant to see if they have any recommendations.

The Bottom Line

At the end of the day, business valuation is complicated—especially considering the different methods that are available to evaluate your business and determine its economic worth.

Overall, it’s safe to say that one approach isn’t necessarily better than another, instead, the best assessment of your company will likely come as a result of combining multiple business valuation methods.

This being said, if the time comes where you do need a small business valuation, your best course of action will be to hire a professional appraiser—as we’ve discussed, this individual will be able to offer the most thorough and objective evaluation of your company.

Article Sources:

• CorporateFinanceInstitute.com. “ Financial Analyst Courses and Training Online “

Seth David is the chief nerd and president of Nerd Enterprises, Inc. which provides consulting and training services in accounting and productivity based software. Consulting services range from basic bookkeeping to CFO-level services such as financial modeling.

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How to Value a Small Business if You’re Looking to Sell

Meredith is a freelance writer and editor with more than a decade of experience. Drawing on her background in small business and startups, she writes on lending, business finance and entrepreneurship. Her writing has also appeared in the New Republic, BBC, Time Inc, The Paris Review Daily, JPMorgan Chase and more.

Sally Lauckner is an editor on NerdWallet's small-business team. She has over 15 years of experience in print and online journalism. Before joining NerdWallet in 2020, Sally was the editorial director at Fundera, where she built and led a team focused on small-business content and specializing in business financing. Her prior experience includes two years as a senior editor at SmartAsset, where she edited a wide range of personal finance content, and five years at the AOL Huffington Post Media Group, where she held a variety of editorial roles. She is based in New York City.

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A small-business valuation represents a company’s total worth based on its business assets, earnings, industry and any debt or losses. Conducting a valuation is an excellent opportunity to assess the financial health and potential of your business, or of a business you’re hoping to buy .

Whether you are planning to sell your business or you already have an offer, knowing how to value a business can help inform your company’s road map and future exit strategies. Entrepreneurs looking to buy an existing business should also be familiar with valuations and feel comfortable estimating value independently of the business owner or broker’s asking price.

How to value a small business

There are some key steps to begin valuing your business. In addition to doing your own research, consider consulting a professional.

1. Understand the terms

Unless you’re a natural-born business or numbers person (or, say, an accountant), business valuation isn’t the easiest process. You'll need to understand some key definitions first.

Seller’s discretionary earnings

Seller’s discretionary earnings (SDE) represents the total financial value that a single owner would get from owning a business on an annual basis. Also referred to as adjusted cash flow, total owner’s benefit, seller’s discretionary cash flow or recast earnings, the calculation includes expenses like the income you report to the IRS, noncash expenses. It essentially represents whatever revenue your business actually generates.

SDE vs. EBITDA

Different from earnings before interest, taxes, depreciation and amortization (EBITDA), SDE also includes the owner’s salary and owner’s benefits. Large businesses generally use EBITDA calculations to value their businesses, and small businesses typically use SDE, since small-business owners often expense personal benefits.

SDE multiple

Your SDE multiple values your business according to industry standards — there is a different multiple for every industry. Your SDE multiple will vary based on market volatility, where your business is located, your company’s size, assets and how much risk is involved in transferring ownership.

The higher your SDE multiple, as you might expect, the more your business is worth. If you used EBITDA to value your business, you would use an EBITDA multiple.

SDE calculation

To calculate your business’s SDE:

Step 1: Find your pretax, pre-interest earnings.

Step 2: Add back purchases that aren’t essential to operations, like vehicles or travel, that you report as business expenses. Employee outings, charitable donations, one-time purchases and your own salary can all be included in your SDE. (Buyers might ask about your discretionary cash flow when you offer them your valuation, so be prepared to include and value each major expense or purchase.)

Step 3: Subtract any current debts or future payments from the net income.

Step 4: Compare with your SDE multiple.

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Once we uncover your personalized matches, our team will consult you on the process moving forward.

2. Organize your documents

To ensure an accurate calculation, sellers and buyers should have organized financial records, which will also be crucial for the actual transfer of ownership.

Business owners need the following documentation in order to ensure a smooth valuation process:

Licenses, deeds and any proprietary documents.

Profit and loss statements and balance sheets for the last three years.

Tax filings and returns.

Short overview of your business or personal finances.

While buyers won't need all of these documents, they should still review their own financials. It's likely that sellers will want to see the credit report and basic financial profile of the individual or business they are selling to.

» MORE: Best small-business accounting software

In addition to financial records, buyers may want to see a business plan , which can help make accurate projections for earnings, how your business will continue to grow and turn a profit, provide important context about your company and detail your key services or goods. It should also detail your business model , which demonstrates how you make money, and shows potential buyers how they’ll actually reach their customer base to generate revenue if they purchase your company.

3. Take stock of your assets and liabilities

Assets and liabilities are an important factor in a business’s overall value, and they’re important to know in detail for both sellers and buyers. Business assets are anything that adds value to your company, such as intellectual property, your production line or company vehicles.

There are two types of assets — tangible and intangible assets — and they’re weighted differently when calculating a business’s total value. Tangible assets are physical assets that are used for regular business operations and lose value over time. They include things like real estate, equipment, inventory and cash on hand.

Intangible assets are things that hold value, but cannot be seen or touched. They include things like patents, copyrights or trademarks, customer loyalty, reputation and intellectual property. Intangible assets are also things that cannot be separated from the company itself.

Liabilities are generally outstanding obligations that detract from the overall value of a business. They include accounts and notes payable, business loans , accrued expenses and unearned revenue. Business owners often keep their business liabilities and pay off their debt after the business is sold.

» MORE: What is a business debt schedule?

4. Research your industry

A deep understanding of your industry’s trends can help both buyers and sellers reach an informed valuation that reflects a business’s assets as well as the current market. Understanding the industry helps:

Determine the SDE multiple as well as the method of valuation used. 

Assess market share and growth potential. 

See what comparable businesses are selling for. 

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Small-business valuation methods

There are several business valuation methods. Each uses a different aspect or variable of a business to calculate its numerical value — either a business’s income, assets or using market data on similar companies. Your ultimate valuation should be the result of consistent calculations, not a mix and match of formulas or approaches.

Income approach

The income approach to business valuation determines the amount of income a business can expect to generate in the future. If you want to take the income approach, you can choose between two commonly used valuation methods.

Discounted cash flow method : This method determines the present value of a business's future cash flow . The business's cash flow forecast is adjusted (or discounted) according to the risk involved in purchasing the business. This approach works best for newer businesses that have high-growth potential, but aren’t yet profitable.

Capitalization of earnings method : The capitalization of earnings method also calculates a business’s future profitability, taking into account the business’s cash flow, annual rate of return (or return on investment), and its expected value. But where the discounted cash flow method accounts for more fluctuations in a business's financial future, the capitalization method assumes that calculations for a single period of time will continue in the future. So, established businesses with stable profitability often use this valuation approach.

Most online business valuation calculators use a variation of the income approach. But if you have more financial information on hand, you can try a more comprehensive business valuation tool that includes both profit and revenue, as well as assets and liability, in the calculation.

Asset-driven approach

Another common method attributes value to a business based solely on its assets. In particular, the Adjusted Net Asset Method calculates the difference between a business's assets — including equipment, property and inventory, and intangible assets—and its liabilities, both of which are adjusted to their fair market values. Asset valuations are also a great tool for internal use and can help you keep track of spending and capital resources.

To do an asset-driven assessment, you’ll make a list of your assets and assign them a monetary value. For equipment or other depreciating assets, that value is usually somewhere between the sale price and the depreciated value. A good rule of thumb is to estimate how much a piece of equipment would sell for today, and use that number.

Because you’re familiar with your own equipment and production, you can make pretty accurate estimates of each of your asset’s value and depreciation. Even if you don't adjust the asset's worth according to the current market, you can still get a good sense of a business’s material value. This method is especially useful if your business mostly holds investments or real estate, isn’t profitable, or if you’re seeking to liquidate. In any of those cases, buyers will be interested in the individual value of your investments or equipment.

Market approach

As you can deduce from its name, the market approach to valuing a business determines a company’s value based on the purchases and sales of comparable companies within the same industry. This approach will specifically help you determine an appropriate selling or purchase price based on your local market. Any business can use this approach to business valuation, as long as it can gather sufficient, relevant data on which to compare their business. It can be an especially useful approach for rapidly growing businesses and industries.

On a similar note...

Business Valuation — Complete Guide to Valuing Your Business

Pro Business Plans

Last Updated: 1/7/2022

B usiness valuation is an essential aspect for any entrepreneur looking to grow their business. However, ascertaining a business’ value can be a precarious task, especially when you’re a startup without much evidence to work with.

In this guide, you will get a lot of insights regarding business valuation, why you need to value your business, factors affecting business value, methods of valuing a business, differences between startup valuation and mature business valuation, and factors that determines startup value.

What is Business Valuation?

Business valuation is a quantitative process of ascertaining the firm’s fair value. A business is valued based on several factors, such as constituents of capital structure, company management, the possibility of future earnings, market values of assets, and many more.

When to Value a Business

A business valuation can be helpful at any phase of your business growth. However, you may need to value your firm under the following circumstances.

• Securing Investment: A quite number of investors will need to know the value of your business so as to compute the amount of equity they would get for their investment and determine its growth potential.
• Developing an Internal Share Market: Knowing your business’s estimation will enable you to set a reasonable and serious cost for offers to be purchased or sold by workers and shareholders. It can likewise be utilized to advise potential investors about the business’s performance.
• Stimulate Business Performance and Growth: A business valuation forms a significant basis of an organization’s review. Having a clear perspective of how your business is progressing can inspire your team to be more resourceful; hence improving your company’s performance.
• Selling Your Organization: Valuation will help you know your business’s worth, which is an essential aspect in case you intend to sell your firm.

Factors Affecting the Value of Your Business

There are various components to consider while valuing your firm, and shockingly, not many of them include money-related values.

By the day’s end, a business is worth what somebody is eager to pay for it, and that can be a pretty abstract thing.

In this way, don’t merely rely on your bookkeeping records — consider all the following when valuing your business:

• Business Brand’s Reputation: Your brand’s reputation is one of your most essential intangible resources. If your organization is notable, very much regarded, and additionally has a great deal of buzz around it, then you’re starting off on a solid foot.
• The Value Your Client Base: While evaluating your client base’s estimation, you should consider things like client dedication, client tenacity, and client focus. If your business is dependent on a few customers, then your client base’s value is low. However, if you have a larger concentration of loyal customers, investors will consider your business more valuable.
• Reasons You’re Doing This Valuation: In case you’re valuing your business since you’re being constrained into a deal, that will bring down its worth. Nonetheless, if you’re valuing it to look for investment and upgrade a growth period, its value will be higher.
• Age or Potential of a Business: A more seasoned business with a strong reputation and reliable income appears to be more valuable than a startup. Likewise, a new eager startup with an enormous expected market potential ahead of it could be more valuable to investors than an established business whose product’s future performance can’t be ascertained.
• Team Behind Your Business: Your human resources are a truly significant aspect of your valuation. An energetic, aspiring, and talented group, who are committed to pushing your business forward, will have a colossal effect on your general worth.
• Quality of Your Product: A solid product, a solid model for delivering that item, and an audience occupied with that product, are essential for a decent valuation.
• Performance Metrics: Your business performance metrics, such as revenue, overheads, and profits, will determine the value of your business.

Methods of Valuing a Business

There are various techniques and markers you can use to value your business. Here is a summary of the most common methods of business valuation:

The Multiplier

To value your business through a multiplier, you’ll have to multiply the Net Profit of Business by Market Sector different. Therefore, Business Value = Net Profit X Market Sector Multiple.

However, you need to be cautious when utilizing the Multiplier because it’s easy to fudge the figures, net profit, and market sector being incredibly variable. Investors know about this, which is the reason it’s imperative to back up your multiplier figure with other proof.

Asset Valuation

Not all organizations are valued dependent on tangible resources, and that is okay. In case you’re an SME or a startup with a great deal of potential, that will work in your favor. However, if you are resource-rich, it would be reasonable to value your business based on assets.

Entry Valuation

Entry valuation entails working out the expenses of setting up your business today, starting from the earliest stage. It’s helpful because it brings other valuation factors — resources and colleagues, for instance — under its umbrella, however, it isn’t so helpful if an investor needs to focus on things like current productivity or future potential.

Discounted Cash Flow

The discounted cash flow method is valuable for intensely invested and well-established organizations. Basically, the strategy predicts future income in light of current and past business patterns over a specified period, usually 15 years.

It then gauges what that future income is worth today. A proper discount interest, such as 15% to 20%, is applied to consider things like risk and inflation. This method is complex, and it relies on steady patterns and a stable future to work effectively.

Comparison with the cost of similar properties in the market is the thing that sets house costs — and it works for organizations, as well. If you can, verify what comparable organizations to yours have been valued at. This will give you a rough idea of your firm’s value.

Explicit Industry Techniques

A few businesses have explicit methods of estimating value applicable to their interests and needs. For instance, retail organizations are frequently valued by the volume of clients or the number of outlets, while IT organizations will, in general, be valued solely on turnover.

Individual Interest

By the day’s end, your business is worth what somebody is eager to pay for it. If you find an investor with a profound interest in what you’re doing, your business’s intangible value rises massively.

Startup vs Mature Business Valuation

Startups will generally have little or no revenues and are still in a phase of instability. Therefore, it is likely their product, strategy, or service has arrived at the market yet. Because of this, it can be challenging to value the company.

However, developed businesses that get consistent income and profit can be valued easily. You can simply value the organization as a multiple of their income before interest, expenses, depreciation, and amortization (EBITDA).

What Determines Startup Value?

Here are the factors that determine the value of a startup:

• Traction: One of the most significant components of demonstrating a valuation is to show that your organization has clients. For instance, having over 100,000 customers means that you may raise $1 million from potential investors.
• Reputation: If a startup proprietor has a history of thinking of smart thoughts or running effective organizations, or the product, methodology, or services, a startup is bound to get a higher valuation, regardless of whether there isn’t traction.
• Product Stage: Any model that a business may have that shows the product or service will help in the valuation.
• Revenue: The amount of revenue the startup is getting will make its valuation straightforward.
• Supply & Demand: If more entrepreneurs are looking for more cash than investors ready to invest, this could influence your business valuation. This likewise incorporates an entrepreneur’s desperation to secure investment and an investor’s willingness to pay a premium.
• Distribution Channel(s): Where a startup sells its product is significant, and if you get a proper distribution channel, the estimation of a startup will be bound to be higher.
• Viability of the Industry: Suppose a particular sector is popular or booming in terms of performance. In that case, investors are more likely to pay premiums, implying your startup will be more valuable if it falls in that industry.

Final Thoughts

Business valuation is an analytical process of determining the firm’s fair value to secure an investment, stimulate business performance, develop an internal share market, and sell an organization.

Before you value your business, you must understand the factors that affect its worth and adopt the right method to get a fair value.

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What is Valuation?

Reasons for performing a valuation, 1. buying or selling a business, 2. strategic planning, 3. capital financing, 4. securities investing, company valuation approaches, method 1: dcf analysis.

• Method 2: comparable company analysis (“comps”)

Method 3: precedent transactions

Football field chart (summary), more valuation methods, additional resources, valuation overview.

The process of determining the present value of a company or an asset

Valuation refers to the process of determining the  present value of a company, investment or an asset. There are a number of common valuation techniques, as described below. Analysts who want to place a value on an asset normally look at the prospective future earning potential of that company or asset.

By trading a security on an exchange, sellers and buyers will dictate the market value of that  bond  or stock. However,  intrinsic value is a concept that refers to a security’s perceived value on the basis of future earnings or other attributes that are not related to a security’s market value. Therefore, the work of analysts when performing a valuation is to know if an investment or a company is undervalued or overvalued by the market.

Key Highlights

• Valuation is the process of determining the theoretically correct value of a company, investment, or asset, as opposed to its cost or current market value.
• Common reasons for performing a valuation are for M&A, strategic planning, capital financing, and investing in securities.
• The three most common investment valuation techniques are DCF analysis, comparable company analysis, and precedent transactions.

Valuation is an important exercise since it can help identify mispriced securities or determine what projects a company should invest. Some of the main reasons for performing a valuation are listed below.

Buyers and sellers will normally have a difference in the value of a business. Both parties would benefit from a valuation when making their ultimate decision on whether to buy or sell and at what price.

A company should only invest in projects that increase its net present value . Therefore, any investment decision is essentially a mini-valuation based on the likelihood of future profitability and value creation.

An objective valuation may be useful when negotiating with banks or any other potential investors for funding. Documentation of a company’s worth, and its ability to generate cash flow, enhances credibility to lenders and equity investors.

Investing in a security, such as a stock or a bond, is essentially a bet that the current market price of the security is not reflective of its intrinsic value . A valuation is necessary in determining that intrinsic value.

When valuing a company as a going concern, there are three main valuation techniques used by industry practitioners: (1) DCF analysis , (2) comparable company analysis, and (3) precedent transactions. These are the most common methods of valuation used in  investment banking , equity research, private equity, corporate development, mergers & acquisitions ( M&A ), leveraged buyouts ( LBO ), and most areas of finance.

As shown in the diagram above, when valuing a business or asset, there are three different approaches one can use. The asset approach calculates the fair market value of individual assets, often including the cost to build or cost to replace. The asset approach method is useful in valuing real estate, such as commercial property, new construction, or special-use properties. 

Next is the income approach, with the discounted cash flow (DCF) being the most common. A DCF is the most detailed and thorough approach to valuation modeling. 

The final approach is the market approach, which is a form of relative valuation and is frequently used in the finance industry. It includes comparable company analysis and precedent transactions analysis.

Discounted cash flow (DCF)  analysis is an  intrinsic value  approach where an analyst forecasts a business’s unlevered  free cash flow into the future and discounts it back to today at the firm’s weighted average cost of capital ( WACC ).

A DCF analysis is performed by  building a financial model  in Excel and requires an extensive amount of detail and analysis. It is the most detailed of the three approaches and requires the most estimates and assumptions. Therefore, the effort required to preparing a DCF model may also often result in the least accurate valuation due to the sheer number of inputs. However, a DCF model allows the analyst to forecast value based on different scenarios and even perform a sensitivity analysis.

For larger businesses, the DCF value is commonly a sum-of-the-parts analysis, where different business units are modeled individually and added together.

Method 2: comparable company analysis (“comps”)

Comparable company analysis  (also called “trading comps”) is a relative valuation method  in which you compare the current value of a business to other similar businesses by looking at trading multiples like P/E,  EV/EBITDA , or other multiples. 

The “comps” valuation method provides an observable value for the business, based on what other comparable companies are currently worth. Comps is the most widely used approach, as the multiples are easy to calculate and always current. The logic follows that if company X trades at a 10-times P/E ratio, and company Y has earnings of $2.50 per share, company Y’s stock must be worth $25.00 per share (assuming the companies have similar risk and return characteristics).

Precedent transactions analysis  is another form of relative valuation where you compare the company in question to other businesses that have recently been sold or acquired in the same industry. These transaction values include the take-over premium included in the price for which they were acquired.

The values represent the entire value of a business and not just a small stake. They are useful for M&A transactions but can easily become dated and no longer reflective of current market conditions as time passes.

Investment bankers will often put together a  football field chart  to summarize the range of values for a business based on the different valuation methods used. Below is an example of a football field graph, which is typically included in an  investment banking pitch book .

As you can see, the graph summarizes the company’s 52-week trading range (it’s stock price, assuming it’s public), the range of prices equity research analysts have for the stock, the range of values from comparable valuation modeling, the range from precedent transaction analysis, and finally the DCF valuation method. The orange dotted line in the middle represents the average valuation from all the methods.

Another valuation method for a company that is a going concern is called the  ability-to-pay analysis . This approach looks at the maximum price an acquirer can pay for a business while still hitting some target. For example, if a private equity  firm needs to hit a  hurdle rate  of 30%, what is the maximum price it can pay for the business?

If the company does not continue to operate, then a  liquidation value  will be estimated based on breaking up and selling the company’s assets. This value is usually very discounted as it assumes the assets will be sold as quickly as possible to any buyer.

DCF Terminal Value

Valuation Drivers

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Small Business Valuation Methods: How to Value a Small Business

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Knowing how much your business is worth is not only for massive corporations — small business owners can benefit from this knowledge too. Your business’s valuation can help you to create more accurate and effective goals and is essential if you’re looking to sell your business. 

In this article, learn how to value a business, when you should find out your business’s value, and how to improve your valuation.

How to Value a Small Business

While you may be pleased by the results, your business’s value isn’t a vanity metric. A proper small business valuation can be important if you’re planning on selling your business, merging, buying out other owners, applying for a business loan , offering employees equity, or going through a major life event. 

However, there are different ways to value a small business, and the appropriate method can depend on the size of the business and purpose of the valuation. Understanding the common methods and why the outcomes will differ can be important for small business owners or corporate executives alike.  

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There are several methods for valuing a small business based on its balance sheet, earnings, projections about the future, and recent sales of similar businesses. Each method has its pros and cons, and can be used in different circumstances. Here’s a quick look at five popular valuation methods:

Adjusted net asset method

An asset-based valuation can be fairly straightforward if your balance sheet is in order, as it largely mirrors what the balance sheet shows. First, add up the value of the business assets and subtract its liabilities to get the starting value. 

Then, to get a more realistic valuation, you may want to put more thought into the numbers. The adjusted net asset method requires you to use your knowledge of the business and current markets to adjust the value of the assets and liabilities.

For example, you may have accounts receivable that are assets on your books but you know you won’t likely collect the full amount. You should adjust your assets down to reflect real-world values.

The adjusted net asset method can be useful if you’re valuing a company that doesn’t have a lot of earnings or is losing money. It’s also a common valuation method for holding companies that own parts of other companies or real estate investments. If you’re considering selling your business, you may also want to perform this valuation to set a floor price. 

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Capitalization of cash flow method.

The capitalization of cash flow (CCF) method is the simpler of the two main income-based methods that you may want to consider when valuing companies that generate income.  

To calculate the business’s value using the CCF method, you’ll divide the cash flow from a specific period by a capitalization rate. You’ll want to use one period’s worth of sustainable and recurring cash flow from the business, and may need to make adjustments if there were recent one-time expenses or income events that you don’t want to include in the results. 

The capitalization rate (cap rate) is the business’s expected rate of return. This is the rate of return a buyer could expect to earn (not included their salary) if they purchase the business. It’s often around 20% to 25% for small businesses.

The simplicity of the CCF method can also impact its predictiveness. However, the CCF method can be a worthwhile valuation method if you’re looking at a mature and stable company that’s unlikely to see big swings in its cash flow. 

Discounted cash flow method

The discounted cash flow (DCF) method is another income-based method. It uses the business’s projected future cash flow and the time value of money to determine the current value. While the CCF is best used with companies that have steady cash flows, the DCF is best for companies that are expected to significantly grow or shrink in the coming years. 

The time value of money is the idea that money is worth more today than it is in the future. For example, if you have a thousand dollars today, you can invest the money, earn interest, and have more than a thousand dollars in five years. A discounted cash flow model takes this into account, which is why it can be also helpful if you’re trying to compare different investment opportunities. 

While the calculations can be a little complex, you can find an online business valuation calculator  that can help. But you’ll still need to figure out which numbers to plug into the calculator.

The business’s cash flow statement is a good place to start, and projected cash flows if they’ve already been created. Additionally, you’ll need to know the discount rate, or weighted average cost of capital (WACC), which can require more complicated calculations. Think of the WACC as the rate the business needs to pay to finance its working capital and long-term debts. 

You’ll also need to decide how many years’ worth of cash flows you want to include. You could base your answer on how confident you are about the future cash flow projections, and use the same number of years if you’re trying to compare DCFs for multiple investments. 

Market- based valuation method

A market-based valuation depends less on the specific business than the current market conditions. With the market-based valuation method, the business’s current market value is determined by comparing the recent sale prices of similar companies.

Finding relevant comps can be difficult if you have a small business, but you may still want to look for at least a few comps if you’re planning on buying or selling a business. If you’re hiring an appraiser, they may also have access to databases with relevant findings. 

Even if the comps aren’t physically located nearby, an appraiser may find similar sized businesses in the same industry and can then make adjustments based on the area. You can also use the results in combination with the other valuation methods to determine a business’s value. 

Seller’s discretionary earnings method

The previous four valuation methods can be used for small businesses and large, publicly traded companies alike. However, the seller’s discretionary earnings (SDE) method is solely used for small business valuation. 

If you’re planning on selling or buying a small business, the SDE method might be best because it can help the buyer understand how much income they can expect to earn each year from the business. To calculate the SDE, you’ll need to determine how much cash it takes to run the business. 

You can start with the business’s earnings before interest and taxes (EBIT), or for a more thorough view, the business’s earnings before interest, taxes, depreciation, and amortization (EBITDA), which you can determine from the financial statements. Then, add back the owner’s compensation (because the new owner can choose a different salary) and benefits, such as health insurance. Also, add back in non-essential, non-recurring, and non-related business expenses. These could include travel, one-time consulting fees, and business use of a personal vehicle. 

Because the SDE is often used when a small business is sold, it’s not uncommon for there to be debates about some of the numbers. These can especially arise around the expenses that get added back to determine the value.

As an example, the seller might want to call a search engine optimization project a one-time expense and add that portion back into the earnings to increase the valuation. However, the buyer might consider this to be an ongoing project that needs to be revisited and paid for each year. They’ll need to come to an agreement before a sale can move forward. 

Reasons to Value Your Business

• You want to sell your business 
• You’re trying to attract investors
• You’re buying out the other owners 
• You’re offering employees equity
• You’re applying for a loan or line of credit
• You want to better understand your business’s growth
• You need values for tax-planning purposes

The list can go on as small business owners’ personal and professional lives revolve around their business and its potential. While many of the reasons above involve changes in the business or its ownership, a personal event (such as a marriage or divorce) may also spur the valuation. 

How to Prepare for a Business Valuation 

If you’re conducting a business valuation for informal purposes, you may want to do it on your own. However, hiring a professional appraiser (you can find one that’s part of the American Society of Appraisers ) or business valuation expert (banks, lenders, and accountants may offer the service) could be a good idea if you need the analysis for more serious matters. The business valuation process can be complex for official purposes, and it’s good to have a professional guide you.

In either case, there are a few steps you can take to prepare for the valuation: 

1. Get your financial documents in order

Every valuation is going to be based, at least in part, on your business’s finances. Even the market-based valuation method requires your business’s financial information to find suitable comps. 

At a minimum, you’ll want the previous three to five years’ worth of your business tax returns and financial statements , including the balance sheet, income statement, and cash flow statement. Comb over these statements to make sure everything is accurate and up to date. 

Other finance-related documents, such as sales reports and industry forecasts can also be important, particularly for DCF and market-based valuations. 

2. Organize other essential documents

Depending on your reason for the business evaluation, you may also want to have copies of your business licenses, permits, deeds, and certifications available, along with any ongoing contracts with insurers, creditors, vendors, and clients. 

If you’re planning on selling the business or looking for business loans for your small business, you’ll likely need to share these along with your financials. You can also pull up your business credit reports and get your business credit scores from Nav to share with creditors and potential buyers. 

3. List additional intangible assets

Your business’s tangible assets (such as cash, property, and equipment) should be listed on your balance sheet. Some intangible assets may be listed there as well, such as copyrights or patents. But think about other intangible assets that may be providing value. 

An extensive email list , loyalty club, good rankings in search engine results, engaged social media profiles, and positive online reviews can all help you attract and retain customers. These types of assets could help improve your business’s valuation even if they don’t have a value on its balance sheet. 

Improving Your Small Business Valuation

Your business’s valuation is going to depend on how much money it makes and increasing revenue and cutting costs are the core essentials to improving your valuation. However, you’ll need to decide where you want to focus your energy.

Hiring a professional appraiser or evaluator might actually be a good first step, as they can give you the current valuation and help you identify your business’s strengths and weaknesses. They may even be able to offer suggestions for improvement based on what they’ve seen work for other businesses. 

There are also ways to demonstrate the business’s value to potential buyers that don’t rely on the numbers. For example, if you can show how processes and systems are in place that will keep the business running smoothly after you leave, buyers may be more willing to agree to a higher valuation. 

Or, perhaps you can highlight how your employees are happy and take ownership of their work. Low turnover can save the business money, and responsible employees can make the transition to new management easier. 

Make a Practice of Regularly Valuing Your Small Business

Learning how to estimate the value of a company can be important for small business owners for many reasons. Even if you’re not planning on selling your business or applying for financing, regularly performing a quick-and-dirty business valuation can help you track your progress over time. Taking a deeper dive into the valuation may help you uncover opportunities for growth.

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How do you calculate the value of a small business?

In order to calculate the value of your business, you can start with a simple formula: Business value = assets – liabilities Your business assets are anything your business owns, including real estate, equipment, and inventory, as well as intangible assets like patents, intellectual property, or any incoming royalties. Liabilities are anything you owe, such as accounts payable, business loans, and even payroll.

What is the rule of thumb for valuing a business?

Ultimately, supply and demand will determine the value of a business. But rules of thumb can help provide a good idea of how much a business is worth. While this will change from business to business, you can use a percentage of your last year of sales as a multiplier to determine the value of your business. 

How many times profit is a small business worth?

Determining how much your small business is worth based on profit isn’t as straightforward as it sounds. There’s not a single formula, as things like your industry, past performance, and relative risk can all play a role in determining your business’s worth. If you use EBIT or EBITDA, the multipliers to determine a business’s value, your numbers can range from 80% of future maintainable earnings (FME) to over 500%.  In general, however, most companies that make less than $5 million a year sell for less than three times EBIT, and companies that make more than $5 million a year are likely to sell for more than three times EBIT. Meanwhile, small businesses that make less than $1 million tend to sell for less than twice their EBIT. 

How much is a business worth with $1 million in sales?

There’s no single calculation that can determine what a business is worth without comparing it to other businesses in the same industry. You also need to take other factors about the business into account, such as how long you’ve been in business.  Here’s an example., If your company is making $1 million per year with a profit of $200,000 EBITDA, you would say your business is making 20% profit. In this case, your company would be worth between $600,000 and $1 million. However, many would simply say that your business’s fair market value is one times your total revenue. In this case, your company would be worth $1 million.  It’s a good idea to get a professional evaluator to help you determine the value of your company, sort through the complexities of business valuation, and make sure you have a non-biased view of your company’s worth.

How do you value a private small business?

Most small businesses are privately owned, rather than publicly owned (in other words, selling shares on the marketplace). Thus, you would follow the standard formula of assets minus liabilities to find the value of your private small business.

How much is a small business usually worth?

A small business is typically worth two to three times its annual revenue. So if your business makes $150,000 per year, its worth would likely be $300,000 to $450,000.

How much is a small business worth when it is sold?

A small business usually sells for what it is valued at, which is most often two to three times its annual sales. If a business makes $50,000 per year, it would likely sell for between $100,000 and $150,000 per year.

What would be the value of a small business that has $500,000 in assets?

You can’t use one calculation to figure out how much a business is worth without doing a comparison with other companies in the same industry. Other factors like time in business matter as well. In this example, you know you have $500,000 in assets. You would then subtract your liabilities to get your starting value, and let’s say you have $100,000 in liabilities. So your starting value is $400,000. You would then need to adjust this value based on the current markets.  Consider getting a professional to help you find your business’s value and ensure you have an objective view of your company’s value.

How do you value a company with no profits?

There are many companies that are pre-revenue, meaning they have yet to bring in a profit. It’s still possible for investors to evaluate what the company is worth, though. Investors look at factors such as the experience and skills of the management team, the market size, how much competition there is, and partnerships and engagement levels.

How do you value a small business with no assets?

The most common way to value a business that doesn’t have assets is the market-based business valuation model. This finds the business’s current market value by comparing it to other similar companies that have sold recently.

What is the formula for small business valuation?

Many small businesses ask, “What is the valuation formula?” when they’re trying to find out how much their business is worth. There are five most commonly used formulas to find a business’s valuation: adjusted net asset method, capitalization of cash flow method, discounted cash flow method, market-based valuation method, and the seller’s discretionary earnings method. Each has pros and cons, as well as different instances that it works best in.

What ratios do you use when valuing a company?

There are several financial ratios that can help you understand the worth of a public company, which is a company traded on the stock market. These include the price-to-earnings ratio, the price-to-book value ratio, the price-to-sales ratio, the price-to-cash flow ratio, and the price or earnings-to-growth ratio. Each of these ratios can be useful tools for small business owners.

How do you value a self-employed business?

If you’re running a self-employed business, this means you work for yourself and are not an employee of another business. Small business owners are considered self-employed. You’ll follow the standard calculation of assets minus liabilities to find your simple value.

What are the advantages of a valuation for a small business?

Finding the valuation of your small business can help you see how it’s performing and create more realistic and effective goals. You’ll better understand your sale value when compared to your competition. You’ll also need to complete a valuation if you plan to sell your business.

This article was originally written on January 31, 2020 and updated on January 17, 2024.

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Tiffany Verbeck

Tiffany Verbeck is a Digital Marketing Copywriter for Nav. She uses the skills she learned from her master’s degree in writing to provide guidance to small businesses trying to navigate the ins-and-outs of financing. Previously, she ran a writing business for three years, and her work has appeared on sites like Business Insider, VaroWorth, and Mission Lane.

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Business Valuation Based on Revenue Explained: What You Need to Know

Business valuation based on revenue is a method where a company’s worth is estimated using its sales figures. This approach often multiplies revenue by an industry-specific multiplier to determine value.

Understanding how to gauge the value of a business is crucial for various stakeholders, including owners, investors, and potential buyers. Revenue-based valuation is a common technique due to its simplicity and the readily available nature of sales data. This method applies a multiplier, grounded in industry averages, to a company’s revenue to estimate its market value.

While this approach provides a quick snapshot of a company’s worth, it’s important to remember that it doesn’t account for expenses, debt, or other financial nuances. Investors and business owners should consider this valuation among others to get a comprehensive view of a company’s financial health. Accurate business valuation is key for informed decision-making, whether for investment opportunities, selling a business, or strategic growth planning.

The Essence Of Business Valuation

Understanding the value of a business is crucial for owners and investors alike. It acts as a financial health check , revealing the company’s strengths and potential . Successful valuation steers business strategies and informs critical decisions.

Key Purposes For Valuing Your Business

• Preparing for Sale: Valuation sets a fair price for negotiations.
• Mergers & Acquisitions : Helps determine synergies and risks .
• Investor Engagement: Attracts funding by showing value to potential investors .
• Strategic Planning: Assists in setting future goals and directions.
• Tax Reporting: Ensures accurate financial disclosure for tax purposes.
• Legal Disputes: Provides a defensible valuation in legal situations.

The Importance Of Revenue In Business Valuation

Revenue is the core indicator of business activities. It reflects a company’s ability to generate sales and maintain sustainable growth .

A robust evaluation based on detailed revenue analysis ensures a solid foundation for any business decision.

Valuation Fundamentals

Understanding business valuation based on revenue is key to knowing your company’s worth. Imagine you have a giant jar full of candy. To know how much candy you have, you need a way to count it. That’s what valuation does for a business. It tells us how big, how sweet, and how valuable the business is by looking at the money it makes.

Core Principles Of Valuation

At its heart, valuation is about simple ideas:

• Economic Value : How much money can the business make?
• Future Potential : Will the business grow and make more money?
• Risk : What are the chances the business might not do well?

Think of these like the seeds to grow our candy jar. They help us predict how full the jar can get over time. Every business is different, so the seeds grow differently for each one. To figure this out, experts use different ways to count the candy.

Common Valuation Approaches

There are a few popular ways to measure business value:

• Income Approach : This adds up all the money a business could make.
• Market Approach : This looks at what similar businesses are worth.
• Asset-Based Approach : This counts the value of everything the business owns.

Imagine you’re measuring three types of candy jars. The income approach weighs the candy by guessing how much new candy will be added. The market approach compares your jar to your friend’s jar. The asset-based approach counts each candy one by one. Each method gives a different look at how much your candy is worth.

Remember, the goal is to give a clear picture of a business’s value. By understanding these approaches, we make sure we aren’t missing any sweets in our count. This is crucial, especially when it comes time to buy, sell, or grow the business.

Revenue-based Valuation

Understanding your business’s worth is crucial. Revenue-Based Valuation is a popular method. It looks at your sales figures. This helps tell how much your business might be worth. Let’s dive deep into when and how to use this approach.

When To Use Revenue-based Valuation

Revenue-Based Valuation suits certain scenarios. It’s ideal when profits are not stable. New businesses often use it. It’s good when businesses invest a lot in growth.

• Start-ups with no earnings yet
• Companies with big growth plans
• Industries where revenue predicts success

Pros And Cons Of Revenue-centric Models

Choosing the right model is key. A revenue-based approach has its ups and downs. It’s simple and clear. But, it doesn’t look at the full picture. Cash flow and profits matter too. Think carefully about your business type.

Calculating Valuation Using Revenue

Understanding a business’s worth is crucial for owners and investors. One common approach is to look at revenue. Valuation using revenue gives a financial baseline. It suits fast-growing companies where profit data may not showcase potential.

The Revenue Multiple Method

Valuing a company through the revenue multiple method involves a simple equation. First, industry benchmarks come into play. They help in choosing the right multiple. A multiple is a factor by which you will multiply the business’s revenue.

For instance, if a tech startup generates $1 million in annual revenue, and the industry standard multiple is 6, the valuation would be:

Finding the right multiple can be tricky. Look at similar companies and their sale prices. Averages in the industry guide these decisions.

Adjustments And Considerations For Revenue Figures

Revenue figures need refining before use. Adjustments and considerations are vital for an accurate valuation.

• Non-recurring sales: Remove one-time sales for a clear picture.
• Market conditions: Consider the current market’s effect on sales.
• Growth trends: Future potential can influence the multiple.

Analyze the financials thoroughly. Adjust revenue figures for refunds, discounts, or any other anomalies. Understanding the true, sustainable revenue is crucial for valuing any business correctly.

Comparative Revenue Metrics

Understanding Comparative Revenue Metrics is vital in business valuation. Revenue alone does not tell the full story of a company’s performance. This is where comparative revenue metrics come into play. They provide context, allowing us to see how a business stacks up against competitors and industry benchmarks. Let’s delve into interpreting these metrics for a better valuation picture.

Benchmarking Against Industry Standards

To accurately assess a business’s health, benchmarking against industry standards is crucial. This involves comparing your revenue figures with those of similar companies in your sector. It helps identify areas of strength and opportunities for improvement.

• Gross Revenue: Overall sales before deductions.
• Net Revenue: Sales after refunds and discounts.
• Revenue Growth Rate: Speed of revenue increase over time.

Industry reports and databases work as resourceful tools for gathering this data. They allow businesses to position their revenue metrics in relation to their competitors. Such positioning often clarifies the true value of a company.

Case Studies: Effective Use Of Revenue Metrics

Case studies highlight the practical application of revenue metrics in business valuation. They show real-world examples of companies that have leveraged these numbers for their benefit.

From these studies, clear patterns emerge. Those with revenue metrics exceeding industry averages often enjoy favorable valuations. This demonstrates why close attention to comparative revenue metrics is non-negotiable in business valuation.

Beyond Revenue: Other Valuation Factors

Business valuation is more than just numbers on a sales report. It’s critical to look deeper into what makes a company valuable.

Unveiling the true value means considering several factors.

Factors like earnings and debts make a big difference.

The Role Of Ebitda In Valuation

Think of EBITDA as the heartbeat of a company’s financial performance. It stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA shows the money a business makes from its core operations. It’s like peering under the hood of a car. It shows the engine’s strength, minus other costs. Valuators use EBITDA to compare companies without tax or capital structure noise.

High EBITDA often means a higher valuation.

Incorporating Assets And Liabilities Into The Valuation

Assets and liabilities are the weights and balloons of a business’s financial health.

Think assets as resources — like cash, inventory, and property.

Liabilities are what the company owes — like loans and bills.

• Assets add value; more assets mean a higher valuation.
• Liabilities detract value; more debts can lower the valuation.

Detecting a company’s net worth involves adding assets and subtracting liabilities.

Valuation becomes clear when you balance the scales between what a company owns and owes.

Challenges In Revenue-based Valuation

Many entrepreneurs and investors focus on revenue when valuing a business. But, this method has its own set of challenges. Understanding these obstacles is key to a fair business valuation.

Limitations Of Revenue As A Valuation Metric

While revenue is a clear-cut figure, it doesn’t always tell the whole story. Revenue may not equal profit . A company can have high revenue and still lose money. This happens if costs outpace sales.

Besides, revenue doesn’t reflect cash flow reality. High sales don’t mean immediate cash . Late payments affect business health.

Also, a one-time spike in sales can mislead. It suggests a value that might not last . Companies need consistent revenue to maintain their value.

Navigating The Pitfalls Of Market Variability

Market ups and downs wildly affect revenue-based valuation. The same company can seem more or less valuable based on market trends.

Think about industry cycles . A booming period can inflate valuations. But when the industry slows, so does the perceived value.

To address this, let’s consider using normalized revenue . This method smooths out abnormal spikes and slumps. It gives a more accurate revenue average over time.

Another smart move is comparing against peers . See how similar businesses fare. This comparison can provide a more grounded valuation.

Preparing For Valuation

Understanding the value of your business is critical for decision-making. Whether selling, seeking investment, or strategizing for growth, knowing your worth shapes choices. Preparing for valuation demands accurate, comprehensive financial information.

Gathering The Right Financial Data

Gather financial records before diving into business valuation. This process requires precision and attention to detail:

• Income statements reflect revenue and expenses.
• Balance sheets provide insight into assets and liabilities.
• Cash flow statements showcase the liquidity of the business.

Collect historical data, ideally from the last three to five years. This gives a clearer financial performance picture. Ready all documents in a clear, organized manner for analysis.

Utilizing Expertise: When To Hire A Valuation Professional

Valuation is complex and crucial. Experts can provide accuracy and save time:

Consider a valuation professional particularly when there’s complexity in your revenue streams or when the stakes are high.

The Future Of Valuation Trends

The dynamic landscape of business valuation continues to evolve with advancements in technology and shifts in the global economy. Understanding the latest trends is crucial for businesses aiming to accurately assess their worth. Let’s explore what the future holds for valuation processes.

Innovations In Valuation Techniques

As technology progresses , so do the methods used to value businesses. Data analytics and artificial intelligence are at the forefront, revolutionizing traditional models. By harnessing the power of big data, firms can gain deeper insights, enabling more precise valuations .

• Integration of machine learning for predictive insights
• Use of blockchain for transparent record-keeping
• Advancement in real-time data analysis tools

Anticipating Changes In Market And Economic Conditions

Business valuation is inseparable from market realities . Experts must anticipate fluctuations in both market and economic environments. This foreseeability can impact company value substantially.

Frequently Asked Questions

How do you evaluate business value based on revenue.

To evaluate business value based on revenue, calculate the revenue multiples by comparing the company’s current revenue to similar businesses. Assess revenue growth trends and stability, and factor in the business’s potential for future earnings.

What Information Is Needed For Business Valuation?

For business valuation , gather financial statements , asset details, profitability forecasts, and market position information. Dissect operations, management, and competitive edge data. Understanding ownership structure and industry trends is essential.

How Much Is A Business Worth With $500 000 In Sales?

The value of a business with $500,000 in sales varies, depending on factors like profit margins, industry, and growth potential. Typically, businesses sell for a multiple of their earnings before interest, taxes, depreciation, and amortization (EBITDA), rather than sales alone.

How Do You Value A Company Based On Turnover?

To value a company based on turnover, apply industry-standard revenue multiples or compare it to similar business sales. This method assesses the company’s market position and potential growth.

Understanding business valuation based on revenue is crucial for any entrepreneur or investor. It provides insight into a company’s worth and its market position. Remember, this metric is just one piece of the puzzle. Combine it with other analyses for a comprehensive view.

Knowledge is power, so use it wisely to make informed decisions.

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What Is a Business Plan?

Understanding business plans, how to write a business plan, common elements of a business plan, the bottom line, business plan: what it is, what's included, and how to write one.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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A business plan is a document that outlines a company's goals and the strategies to achieve them. It's valuable for both startups and established companies. For startups, a well-crafted business plan is crucial for attracting potential lenders and investors. Established businesses use business plans to stay on track and aligned with their growth objectives. This article will explain the key components of an effective business plan and guidance on how to write one.

Key Takeaways

• A business plan is a document detailing a company's business activities and strategies for achieving its goals.
• Startup companies use business plans to launch their venture and to attract outside investors.
• For established companies, a business plan helps keep the executive team focused on short- and long-term objectives.
• There's no single required format for a business plan, but certain key elements are essential for most companies.

Investopedia / Ryan Oakley

Any new business should have a business plan in place before beginning operations. Banks and venture capital firms often want to see a business plan before considering making a loan or providing capital to new businesses.

Even if a company doesn't need additional funding, having a business plan helps it stay focused on its goals. Research from the University of Oregon shows that businesses with a plan are significantly more likely to secure funding than those without one. Moreover, companies with a business plan grow 30% faster than those that don't plan. According to a Harvard Business Review article, entrepreneurs who write formal plans are 16% more likely to achieve viability than those who don't.

A business plan should ideally be reviewed and updated periodically to reflect achieved goals or changes in direction. An established business moving in a new direction might even create an entirely new plan.

There are numerous benefits to creating (and sticking to) a well-conceived business plan. It allows for careful consideration of ideas before significant investment, highlights potential obstacles to success, and provides a tool for seeking objective feedback from trusted outsiders. A business plan may also help ensure that a company’s executive team remains aligned on strategic action items and priorities.

While business plans vary widely, even among competitors in the same industry, they often share basic elements detailed below.

A well-crafted business plan is essential for attracting investors and guiding a company's strategic growth. It should address market needs and investor requirements and provide clear financial projections.

While there are any number of templates that you can use to write a business plan, it's best to try to avoid producing a generic-looking one. Let your plan reflect the unique personality of your business.

Many business plans use some combination of the sections below, with varying levels of detail, depending on the company.

The length of a business plan can vary greatly from business to business. Regardless, gathering the basic information into a 15- to 25-page document is best. Any additional crucial elements, such as patent applications, can be referenced in the main document and included as appendices.

Common elements in many business plans include:

• Executive summary : This section introduces the company and includes its mission statement along with relevant information about the company's leadership, employees, operations, and locations.
• Products and services : Describe the products and services the company offers or plans to introduce. Include details on pricing, product lifespan, and unique consumer benefits. Mention production and manufacturing processes, relevant patents , proprietary technology , and research and development (R&D) information.
• Market analysis : Explain the current state of the industry and the competition. Detail where the company fits in, the types of customers it plans to target, and how it plans to capture market share from competitors.
• Marketing strategy : Outline the company's plans to attract and retain customers, including anticipated advertising and marketing campaigns. Describe the distribution channels that will be used to deliver products or services to consumers.
• Financial plans and projections : Established businesses should include financial statements, balance sheets, and other relevant financial information. New businesses should provide financial targets and estimates for the first few years. This section may also include any funding requests.

Investors want to see a clear exit strategy, expected returns, and a timeline for cashing out. It's likely a good idea to provide five-year profitability forecasts and realistic financial estimates.

2 Types of Business Plans

Business plans can vary in format, often categorized into traditional and lean startup plans. According to the U.S. Small Business Administration (SBA) , the traditional business plan is the more common of the two.

• Traditional business plans : These are detailed and lengthy, requiring more effort to create but offering comprehensive information that can be persuasive to potential investors.
• Lean startup business plans : These are concise, sometimes just one page, and focus on key elements. While they save time, companies should be ready to provide additional details if requested by investors or lenders.

Why Do Business Plans Fail?

A business plan isn't a surefire recipe for success. The plan may have been unrealistic in its assumptions and projections. Markets and the economy might change in ways that couldn't have been foreseen. A competitor might introduce a revolutionary new product or service. All this calls for building flexibility into your plan, so you can pivot to a new course if needed.

How Often Should a Business Plan Be Updated?

How frequently a business plan needs to be revised will depend on its nature. Updating your business plan is crucial due to changes in external factors (market trends, competition, and regulations) and internal developments (like employee growth and new products). While a well-established business might want to review its plan once a year and make changes if necessary, a new or fast-growing business in a fiercely competitive market might want to revise it more often, such as quarterly.

What Does a Lean Startup Business Plan Include?

The lean startup business plan is ideal for quickly explaining a business, especially for new companies that don't have much information yet. Key sections may include a value proposition , major activities and advantages, resources (staff, intellectual property, and capital), partnerships, customer segments, and revenue sources.

A well-crafted business plan is crucial for any company, whether it's a startup looking for investment or an established business wanting to stay on course. It outlines goals and strategies, boosting a company's chances of securing funding and achieving growth.

As your business and the market change, update your business plan regularly. This keeps it relevant and aligned with your current goals and conditions. Think of your business plan as a living document that evolves with your company, not something carved in stone.

University of Oregon Department of Economics. " Evaluation of the Effectiveness of Business Planning Using Palo Alto's Business Plan Pro ." Eason Ding & Tim Hursey.

Bplans. " Do You Need a Business Plan? Scientific Research Says Yes ."

Harvard Business Review. " Research: Writing a Business Plan Makes Your Startup More Likely to Succeed ."

Harvard Business Review. " How to Write a Winning Business Plan ."

U.S. Small Business Administration. " Write Your Business Plan ."

SCORE. " When and Why Should You Review Your Business Plan? "

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Run » finance, what is a business valuation and how do you calculate it.

There are multiple ways to find the economic value of your business, with different calculations that can be used for different purposes.

How do you put a price on the time, effort and passion you’ve put into building a successful small business? It can be hard to objectively assess how much your venture is worth after putting so much work in over the years. This is where business valuation calculations, ideally handled by a third-party expert, can play a role. Business valuations are used for mergers, acquisitions, tax purposes and more. Here’s how business valuations work and how to calculate the economic value of your company.

[Read more: 3 Things to Consider When Selling a Business During a Pandemic ]

What is a business valuation?

A business valuation assesses the economic value of part or all of a business. Business valuations are used in a number of circumstances, including to determine the sale value of a business, to establish partner ownership, for tax purposes or even in divorce proceedings.

Generally, the valuation process analyzes all aspects of the business, including the company’s management, capital structure, future earnings and the market value of its assets. In the United States, business valuations are usually carried out by a professional who is Accredited in Business Valuation (ABV). This certification, awarded by the American Institute of Certified Public Accountants, is given to CPAs who pass an exam and meet minimum standards set by the AICPA.

If you’re seeking financing from lenders, investment bankers or venture capitalists, you may need an ABV-certified professional to help carry out your business valuation. If you’re simply looking to understand how much your venture is worth, you can carry out your own analysis using one of the business valuation methods listed below.

[Read more: How to Calculate a Business Valuation ]

Business valuation methods

There are three common methods to evaluating the economic worth of a business. These categories are:

• Asset-based methods : Sum up all of the investments in the company to determine the value of the business.
• Earning value methods : Evaluate the company based on its ability to produce wealth in the future.
• Market value methods : Estimate what the company is worth based on similar businesses that have recently been sold.

In general, try to use more than one method to get the most accurate depiction of your business value.

There are pros and cons to each of these approaches to valuation. An asset-based approach, for instance, works well for corporations in which all assets are owned by the company and will be included in the sale. But, for a sole proprietor, this approach can be more difficult; which assets should be considered personal, versus business-related?

Generally, the two main earning value methods — capitalizing past earnings and discounted future earnings — are used when a company is seeking to buy or merge with another company. Market-value approaches are the least accurate and can lead to a business being under- or overvalued.

How to calculate a business’s value

Often, business valuations are performed by a licensed professional. To find an ABV who can help, look for someone registered with the American Society of Appraisers (ASA).

If you’re simply looking to get a basic idea of what your business is worth, there are a few steps you can take to get a rough estimate. Start by calculating your seller’s discretionary earnings (SDE) . SDE is like EBITDA, with owner’s salary and owner’s benefits added back in. “Start with your pretax, pre-interest earnings. Then, you’ll add back in any purchases that aren’t essential to operations, like vehicles or travel, that you report as business expenses. Employee outings, charitable donations, one-time purchases and your own salary can all be included in your SDE,” wrote NerdWallet .

Once you have your SDE, take stock of your assets, do a little market research to see similar businesses have sold for, and pay attention to industry trends to see if you can ask for a higher valuation.

In general, try to use more than one method to get the most accurate depiction of your business value. “A general rule of thumb in business valuation is that you will want to use multiple methods. Using three to four methods will allow you to estimate fair value with more accuracy,” wrote the experts at The Balance .

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Business Valuation for Investors: Definition and Methods

What business valuations are and how to do them

What Is Business Valuation?

Why you would need to do a business valuation, business valuation methods, what business valuation means to investors, frequently asked questions (faqs).

Klaus Vedfelt / Getty Images

A business valuation is how the story of a company, its history, brand, products, and markets, is translated into dollars and cents. Valuations are used by investors, owners, bankers, and creditors, as well as the IRS, and the process can have very different results depending on the objective. Accurately calculating value is both an art and a science.

Here’s an overview of the how, why, and who of business valuations.

Key Takeaways

• All business valuations are estimates of economic value.
• A business valuation is influenced by who does it and why.
• Pricing and valuation are not the same thing.

Business valuation can be described as the process or result of determining the economic value of a company. All businesses have one thing in common: The goal is to generate profits for shareholders. Time frames, methods, and expectations differ, but the goal is the same.

Ultimately, the value of any business is the present value of expected future profits. The valuation process looks in depth at the operation, expenses, revenues, strategy, and risks of the business to arrive at assumptions for future earnings, time horizon, discount rates, and growth rates.

All business valuations are estimates. The objective of the valuation, and who does the analysis, heavily influences the end result. Investment bankers valuing a company to take it public want to justify the highest number possible, while accountants valuing a company for tax purposes want to arrive at the lowest number possible.

Valuation is different from pricing. Valuation is intrinsic; it’s based on the actual performance of the business. Pricing results from supply and demand; it incorporates market influences such as overall direction of prices, other investors, and new information such as rumors and news.

For an owner who may be looking for financing, considering a sale, or updating a financial plan, here are some common reasons for a business valuation.

Merger, Acquisition, and Financing Transactions

Valuations are fundamental to negotiations for the sale, purchase, or merger of a business. Valuations are used to benchmark buy-ins and buy-outs for partners and shareholders. Lenders and creditors often require valuations as a condition for financing. Valuations are also used to establish and update employee stock ownership plans (ESOPs).

Tax and Succession Planning

Valuations determine estate and gift tax liabilities and have an important role in retirement planning. Tax and succession valuations follow IRS guidelines.

Valuations are also often central to divorce proceedings, resolving partnership disputes, and settlements for legal damages.

Strategic Planning

The in-depth analysis of a business valuation can help owners better understand drivers of growth and profit.

The valuation method used depends on the condition of the business and the purpose of the valuation. The discounted cash-flow method is generally used for healthy companies generating a profit.

Discounted Cash Flow

The discounted cash flow method determines the present value of future profits, or earnings. The discount rate reflects the potential risk of the business not meeting profit expectations. A higher discount rate results in a lower value, which reflects a greater risk posed by the business. There are variations of the discounted cash flow method that use dividends, free cash flow, or other measures instead of earnings. The discounted cash flow method usually calculates the present value of five years of earnings adjusted for growth, and future earnings beyond five years (known as terminal value).

Net Asset, or Book, Value

The net asset value, also known as book value, is the fair market value of the business assets minus total liabilities on its balance sheet. Investors and lenders will consider net asset value for younger companies with limited financial histories. Net asset value is also useful as a lower limit for a valuation range, as it only measures a business’s tangible assets .

Liquidation Value

Liquidation value is the net asset value discounted for a distressed sale. Investors and lenders may consider liquidation value for younger or potentially distressed companies.

Market Value

The market value method is a relative method. It compares a company with its peers and within its industry to arrive at a value by using multiples like price-to-earnings ratio (P/E) . For example, one could value the Really Cool Fans Co. by applying an average P/E multiple for appliance stores to the company’s earnings like this:

Value = Price / Earnings Multiple 25 x earnings $120,000 = $3,000,000

The problem with using a relative method is that it incorporates any errors the market makes in valuing comparable companies as well as in the overall direction of prices.

Valuing a business is a complex process, and there aren’t any shortcuts. For the average investor, research reports can offer insights into a company’s value. The business valuation process is an in-depth analysis, yet at the same time, it’s only an estimate. 

A basic understanding of the valuation methods, however, can help you clarify your investment philosophy and strategy.

A true value investor analyzes stocks independently of the market, and looks for gaps between value and price. They believe that over time, price will catch up with value. Price investors look for market trends in the demand for a stock using technical analysis , then try to get ahead of those trends.

Efficient-market investors believe the market accurately reflects value. Value and price investors use active management styles, by selecting specific stocks with a goal of outperforming the market. Efficient market investors use passive investment styles, such as index funds.

Is the date of a business valuation important?

Yes, valuations for financial reporting and tax purposes have to be completed by a deadline. Valuations for mergers and acquisitions , financing, and other transactions have to meet the requirements of the parties involved.

What are the elements of a business valuation?

A business valuation can be thought of in terms of “why,” “how,” and “who.”

• Why is the objective of the valuation. Valuations done for different purposes will probably yield different results. 
• How is the valuation method selected. Different methods will produce different results.
• Who is the person or firm performing the valuation. Their experience and philosophy will influence the results.

What are common mistakes when valuing a business?

For the average investor, the biggest mistake is confusing pricing with valuation. Pricing considers demand, and valuation doesn’t. Pricing and valuation are both used to make investment decisions, but they’re different.

IRS. " IRS Revenue Ruling 59-60 ."

Patrick L. Anderson, Ilhan K. Geckil, and Nicole Funari. " The Three Essential Factors in Estimating Business Value or Commercial Damages ." AEG Working Paper 2007-1 .

National Association of Certified Valuators and Analysts. " Chapter Six - Commonly Used Methods of Valuation ." Page 7.

National Association of Certified Valuators and Analysts. " Chapter Six - Commonly Used Methods of Valuation ." Page 13.

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Using a Business Valuation for a Business Plan

Mar 5, 2024 | Business Appraisal , Business Plan , Business Valuation

Whether you are starting , buying , expanding , or selling a business , it is important to have a strong business plan. A business plan is a document that outlines a business’s goals, strategies, operations, and financial projections. This document serves as a roadmap to help business owners succeed. If you are looking to create or strengthen a business plan, it is helpful to obtain a business valuation . As part of a business valuation for a business plan, operators gain crucial insights into a business’s risks, opportunities, and financial health. 

Peak Business Valuation is happy to help! As a business appraiser, Peak values thousands of businesses throughout the United States. We can provide you with a business valuation for a business plan. In addition, Peak Business Valuation can discuss any questions you may have on business plans and valuing a business. Start now by scheduling a free consultation with Peak Business Valuation below! 

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Creating a Business Plan

Creating a business plan involves several steps. This can include conducting market research, setting goals, outlining the specifics of products and services, creating financial projections, etc… Business owners can enhance this process by receiving a business valuation for a business plan. During a business valuation, valuation experts analyze the financial standing of your business. In addition, business appraisers conduct a thorough risk assessment and provide business owners with a valuation report. 

In the following paragraphs, we discuss how to use a business valuation to create a strong business plan. For more information, see Creating a Strong Business Plan . 

Understanding the Value of a Business

First, understanding the true value of a business helps operators make decisions about resource allocation, growth opportunities, and potential risks. This also ensures that your goals are aligned with your business’s current value. As such, a business valuation provides a strong foundation for your business plan. To learn more, schedule a free consultation with Peak Business Valuation ! 

Setting Realistic Goals

Next, to set realistic financial goals, you need to understand the current value of your business. As such, a business valuation for a business plan plays an important role in goal setting. In addition to calculating a business’s fair market value, business appraisers assess the strengths and weaknesses of a business. With these insights, you can create an effective strategy to maximize the value of a business . Read How to Increase the Value of Your Business to learn more. 

Attracting Investors and Securing Financing

For many businesses, attracting investors and securing financing for a small business is essential. Obtaining a business valuation provides investors and lenders with a clear understanding of your company’s potential. This shows the feasibility of your business to stakeholders and demonstrates transparency and financial diligence. As such, receiving a business valuation for a business plan makes it more compelling to potential financiers. If you are seeking financing for a small business, consider securing an SBA loan . To learn more, see SBA Loans or SBA Financing .

As a professional business appraiser, Peak Business Valuation works with over 90 SBA lenders across the country. We are happy to connect you with an experienced SBA lender that meets your needs! Additionally, Peak can provide you with a business valuation and discuss any questions you may have on business valuations and creating a business plan. Get started today by scheduling a free consultation with Peak Business Valuation below! 

Minimizing Risks 

Furthermore, using a business valuation for a business plan helps identify and mitigate risks. The valuation process analyzes the strengths, weaknesses, risks, and opportunities associated with a business. This information helps business owners develop strategies to overcome challenges. In addition, understanding the weaknesses of a business allows operators to make adjustments to increase the business’s value. To learn more about navigating risks, see Risks When Buying a Business . 

Allocating Resources

As mentioned before, the valuation report provides valuable insights into a business’s strengths and weaknesses. This information allows you to allocate resources where they will have the most impact. For example, if the valuation report shows that your business lacks a strong online presence, you can allocate resources toward developing your website. As such, receiving a business valuation for a business plan can help you optimize resource allocation and improve a business’s efficiency.  

Strategic Decision-Making and Exit Planning

Finally, business valuations are crucial for strategic decision-making and exit planning . The valuation report provides a data-driven summary of your company’s fair market value and potential growth opportunities. This helps you understand how various strategies impact your business’s value. In addition, you can use these insights to develop a detailed exit plan whether you are selling the business , gifting it to family members , or making it public. As such, with a business valuation for a business plan, you can make informed choices that align with your business’s long-term objectives. If you have any questions, reach out to Peak today! See How Exit Planning Affects Your Business to learn more. 

If you are looking to start, buy , expand , or sell a business , it is vital to have a strong business plan. Business valuations are helpful whether you are creating a new business plan or strengthening your current one. As part of a business valuation, you will learn the value of a small business and discover the associated risks and opportunities. These insights can help you make informed decisions to maximize the value of a business . 

Peak Business Valuation , business appraiser, can help you with your business plan through a business valuation. We are happy to provide you with a business valuation for a small business and discuss any questions you may have about a business valuation for a business plan . Schedule a free consultation with Peak Business Valuation to get started!

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Rules of Thumb Business Valuation Methods Explained

Colin McCrea

7 min. read

Updated October 24, 2023

The rule of thumb has a long history in the business world especially when it comes to valuing business interests in the community. In order to avoid formal valuation report costs, shareholders utilize benchmarks of the industry and rules of thumb to estimate the ballpark values of their interests. This approach acts according to different scenarios where the rule of thumb may be more or less effective. 

This article will cover all about the rule of thumb business valuation approaches, when to use them, and their pros and cons.

Rules of thumb and business valuation 

Valuation techniques can materially undervalue or overvalue business interests. It enables shareholders to estimate the rough value of their business quickly and cost-effectively. However, in scenarios where you have to estimate a more precise and technical value like estate planning, litigation, and transactions—rules of thumb do not provide an accurate value.

What is a rule of thumb business valuation approach?

The rule of thumb is a business valuation method that is based on common sense and experience. It is a general principle that is regarded as approximately accurate but not meant to be scientifically correct. For estimating the value of a business, the process involves applying a multiple to an economic benefit of a specific industry. Metrics such as discretionary cash flow or business revenue are used. 

A company’s goodwill might be worth 2x more than the discretionary cash flow, or the accounting practice’s value might be worth 1 to 1.35x the annual revenue + work-in-progress (inventory). The rule of thumb traditionally originated from the combination of observations, real-world market transactions, hearsay, and experience. 

When to use the rules of thumb for a business valuation? 

This approach usually values a company depending on multiples from the specific industry such as cash flows, revenues, EBITDA, and others. Even though this is a valid method, you cannot use only this approach while valuing a business. The reason for this is that the rule of thumb only gives an estimated valuation that is specific to the industry. Different markets will have several different variations in multiples from the rule of thumb. 

Many other factors affect the valuation of a business . If two businesses are in the same industry, it is not necessary that you can compare them with each other as there can be differences in the business practices, customer base, cost structures, etc. A business valuation through the rule of thumb approach is generally developed over a long time. But, companies and industries keep evolving and growing and applying old value factors can give you an incorrect estimate. 

That said, business owners can still benefit from a rule of thumb as it can provide insights on a ballpark estimate for the value of a company. It can also suggest special purchasers, those who willingly pay a higher price for a company, by benefitting from the perceived synergies of purchasers. 

For many business owners, getting a formal valuation is worth the investment. Some reasons why include needing a more detailed picture of your company’s value, submitting taxes, outlining employee stock option plans, or presenting to investors or creditors.

• Rules of thumb in business valuation

The general rules of thumb are a good measure for certain industries, and where your company may stand compared to other industry peers . So seeing how the metrics in key industries stack up against each other may give you insight into whether your company is performing well or not. 

Many companies come from a variety of industries. While companies are all different, getting a valuation is the same process regardless of the industry. To explain further, let’s take a look at this list of the most profitable industries (according to a recent writeup from Yahoo Finance ).  

• Software (system and application)
• Computer peripherals
• Drugs and Pharmaceuticals
• Oil and Gas
• Household products
• Computer Services
• Healthcare Support Services
• Life Insurance
• Semiconductor Industry
• Information

In order to conduct the valuation for companies in these industries, there are several calculations that valuation analysts use. The following formulas are used to calculate the various aspects of the business valuation:

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Sales Multiples

Where Net Sales = Annual Gross Sales, net of returns and discounts allowed, if any.

The sales multiplier is the most used valuation metric, as it takes your total sales and compares them to other companies and their sales multiples. The majority of small and medium-sized companies used this metric for their valuation.

EBITA Multiple 

Where EBITDA = Operating Profit + Depreciation & Amortization

EBITDA means Earnings Before Interest, Taxes, Depreciation, and Amortization. This is commonly used for finding the value of medium to large businesses. Investors are able to compare your business to others in the same industry by taking away the expenses that skew a fair comparison.

SDE Multiple

Where SDE = Operating Profit + Depreciation + Amortization + Owner’s Compensation

SDE stands for seller’s discretionary earnings. This is the most common multiple to value small businesses. By using this, someone who is looking to acquire your business lets them know how much they would earn if they worked in the company. 

Gross Profit Multiple

Where Gross Profit = Net Sales – Cost of Goods Sold

Obtaining the gross profit can work best as a valuation method for companies that are losing money, but their gross profit serves as a good indicator for their total value.

Rule of thumb table

Given below is a table that describes the sales multiple, EBITDA multiple, SDE multiple, and profit multiple of various businesses. Have a look at it to understand more about the figures. 

Pros and cons of the rule of thumb valuation approach 

The rule of thumb valuation approach has several pros, but also cons. It’s important to know why this approach can be helpful but also why it won’t work for certain situations.

• The approach is straightforward, simple, and fast to apply
• You can save money and time to determine the value
• There are times that the rules of thumb are noted in buy-sell agreements to assist concerned parties in seeing the value they would receive in the transferral of equity
• The approach can have hidden assumptions concerning the risks and profitability of a company, which can lead to an incorrect valuation and a drop in price
• It does not reflect the essential items in the balance sheet (such as debt levels, real estate, non-operating assets, or cash on hand)
• Due to one-time shortfalls, the rule of thumb can drive wrong conclusions and estimations. 
• Examples of rule of thumb valuation

Let us take an example to understand the rule of thumb better. One rule in this approach is that insurance agencies tend to sell for 1 to 1.5x their net commission revenue. This generates an MVIC (market value of invested capital) basis. Here are two scenarios in which the rule of thumb can play out:

Base scenario

An insurance agency has a revenue of $2m. It has $600,000 in EBITDA. The valuation can be $2.4m MVIC. This falls within the spectrum of 1-1.5x of the net commission revenue rule of thumb.

Low-profit scenario

The agency revenue is steady at $2m, but the earnings before interest, tax, depreciation, and amortization drop to $360,000. The value is close to $1.4m. This value is less than the rule of thumb guidelines and settled in the spectrum of $2m to $3m. This means that you would have overpaid for the company.

Get professional advice for valuation 

Business shareholders have a unique tool to give a rough value of their business interests. This is an opportunity for them to estimate the ballpark value of the business fast and cost-efficiently. Shareholders can use the method in limited scenarios, be cautious, and not only rely on the rule of thumb valuation. 

Keep in mind that it is vital to know and understand the limitations and inner workings of the valuation method. It is best that before you use the rule of thumb valuation as your only estimation method, you should consult a professional for advice .

Colin is the CVA of Eqvista , leading in the valuation section of private companies, and specializing in the space around company valuation, investments, VC funding, seed funding, cap table, equity management.

Table of Contents

• Rules of thumb and business valuation 
• Pros and cons of the rule of thumb valuation approach 
• Get professional advice for valuation 

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Buying and Selling a Business | Calculators

Business Valuation Calculator: How Much Is Yours Worth?

Published November 19, 2019

Published Nov 19, 2019

WRITTEN BY: Robert Newcomer-Dyer

A business valuation calculator helps buyers and sellers determine a rough estimate of a business’s value. Two of the most common business valuation formulas begin with either annual sales or annual profits (also known as seller discretionary earnings), multiplied by an industry multiple. Both methods are great starting points to accurately value your business.

For a more in-depth analysis, which can help maximize your payout when selling your business, consider working with a business valuation provider like Guidant. For $495, a dedicated valuation specialist at Guidant will provide a detailed business valuation, financing assessment, and in-depth industry report.

Visit Guidant

Factors That Go Into A Business Valuation

The factors most brokers will take into account when assessing your business include:

• Growth trends
• Website traffic (if significant to your business model)
• Age of business
• Online and offline sales network
• Business model
• Competitors
• Company assets

Getting a ballpark value by using the business valuation calculator above will be useful to buyers, sellers, brokers, and other parties who need a quick estimate. However, you may want a more detailed analysis of what your business is worth, instead of just a thumb in the air estimate. In order to get that you’ll have to find a professional, which often can cost tens of thousands of dollars.

Many business brokers offer a free business valuation to business owners that are ready to sell their business, especially those businesses with net cash flow above $100,000. These valuations will take significantly more information into account than most business valuation calculators, increasing their accuracy.

Tangible Assets vs Intangible Assets

While not included in our business valuation calculator, tangible and intangible assets are both critical pieces of the business valuation puzzle. Tangible assets such as commercial real estate, equipment, and inventory all have the potential to increase the value of a business; and businesses that lack these tangible assets may have a lower value compared to counterparts.

Some intangible assets are difficult to put a price tag on, but they should be valued. A business broker or mergers and acquisitions (M&A) expert with deal-making experience can help determine the value of these assets. An accurate valuation will help you set a price for your business as well as play a significant role in the type of financing options a potential buyer may have.

How To Use The Business Valuation Calculator

If you’re buying a business, this business valuation calculator is designed to tell you whether you can afford to purchase the business and whether the business is worth its asking price. If you’re a seller, the calculator is a reality check. Essentially it gives you an estimation of the price you can charge if you want to attract potential buyers.

Here’s a simple breakdown of how to use the valuation calculator properly:

Business Valuation Calculator Inputs

The inputs in the calculator are the boxes where you must add information about your business. Below we analyze what you should include in each category.

Select the industry to which the business you’re buying or selling belongs. If the exact industry is not there, choose the closest match. This is an important step because the multiplier that the calculator uses to come up with the final valuation will vary based on the industry the business belongs to.

For example, a restaurant with $100,000 in sales or profits will be valued less than a medical practice with the same sales or profits. This is because a medical practice will typically be more stable and have a higher long-term success rate than a restaurant.

Last 12 Months Sales

Type in the business’s sales over the last 12 months. This can be found by looking at the latest income statement. Sales are the revenue that the business generates before subtracting any expenses.

Last 12 Months Profits + Owner’s Salary

Profit is your revenue minus expenses. You can find this number on the business’s latest profit and loss statement . Add in the owner’s salary as well before inputting this number into the calculator.

Business Valuation Calculator Outputs

The outputs are the fields provided after calculations are complete, and display the potential value of the business. The business valuation calculator only has two output fields.

Business Value Based on Sales

Our calculator will give you an approximate value for your business by taking the annual sales and multiplying it by the appropriate industry multiplier. For example, if you are selling a law firm that made $100,000 in annual sales, the industry sales multiplier is 1.03, and the approximate value is $100,000 (x) 1.03 = $103,000.

Business Value Based on Profits + Owner’s Salary

Our calculator will also give you an approximate value for your business by taking the annual profit and multiplying it by the appropriate industry multiplier. Taking the same example of a law firm, suppose the profits were $40,000. The industry profit multiplier is 1.99, so the approximate value is $40,000 (x) 1.99 = $79,600.

Note that there will always be a discrepancy between the business value based on sales and the business value based on profits. The two numbers give you an approximate range of potential values for your business. For some small businesses, the profit-based number will be more accurate because the business may have a lot of sales but also a lot of operating expenses. This means the ultimate profit potential of the business is quite low.

Business Valuation Calculator Formula

There are many ways to value a business , and which method is most reliable will depend on the annual revenue of the business as well as how much data is available, among other factors. In addition to multiples of annual sales and annual profits, which we’ve included in our calculator, business owners may wish to consider other methods such as market-based and asset-based valuation approaches.

Annual Sales Multiple Formula

Business Valuation = Annual sales x industry multiple

Seller’s Discretionary Earnings (SDE) Multiple Formula

SDE Valuation = (Annual profits + owner’s salary) x industry multiple

When to Consider Using a Business Valuation Expert

A business valuation expert can help sellers obtain the best price for their business while also ensuring that the sales price is based on strong data. The case for using a business valuation expert depends on a number of different factors, including the size of the business, the complexity of its operations, and the industry and market factors that influence its growth.

Why Use a Pro

“Valuation is all about analyzing the company’s ability to produce future cash flow, combined with what the market value for their business is selling for. The short-term goal to selling a business is to increase sales and profit, but valuation is a combination of where the business is right now and where it could go.” —Jock Purtle, Founder of Business Exits

Tips For Sellers

If you’re looking to get a business valuation so that you can sell your business, then you’ll likely want to know how to maximize the sale price.

Our top three tips to help you maximize the value of your business are:

1. Prepare for the Sale

Start preparing long before you put the business up for sale. Get your books in order, and make sure there aren’t any accounting or reporting mistakes. These can slow down the sale process, and make it difficult to maximize your value. The fewer things that look wrong when your business is analyzed, the easier it will be to get to closing.

Also, when you’re ready to sell, make sure you have the right documentation ready to go before approaching a business broker. This will speed up your process, and give the broker more confidence that they can count on you being ready when you need to provide more information to them later.

The documents business owners should have ready are:

• 2+ years of business tax returns
• Current P&L (profit and loss statement)
• Current balance sheet

2. Use a Business Broker

Using a broker not only will set your expectations at an acceptable level, but it could also make or break your entire sale. An experienced broker will be able to maximize the value in your sale and get you the largest sum possible for your business. Brokers are often able to get much larger sale amounts than you’re able to get on your own.

Choosing the best business broker for your situation also takes away many of the headaches that would otherwise fall on you. Try outsourcing to a business broker like VNB Business Brokers so they can handle the administrative work, marketing your business for sale, communications with potential buyers, and negotiating both sales prices and final contract terms.

One free consultation with VNB will provide you with answers to questions like:

• What is my business worth?
• Can the valuation price be increased?
• How long will it take to sell my business?
• What’s the next step?

Meanwhile, you can stay focused on operating your business, and continuing to maximize its value until it’s time to sell. Click below to schedule your free consultation today.

Visit VNB Business Brokers

3. Don’t Let Your Emotions Impact the Sale

Your business can feel like an old childhood friend, or even a family member, because of the amount of time you’ve spent working in it. You’ve likely poured your heart and soul into making the business what it is today. However, according to Jock, “The market is the market.”

This means that your business is going to get the value that the market dictates based on your performance, the current economy, and the industry. Being emotional about what potential buyers value your business at isn’t going to help you get to closing. Put yourself in the buyer’s shoes, and don’t get emotional if you want a smooth sales process at a maximum price.

3 Tips For Buyers

Buying a business can often be even more complicated than selling, because you may not be familiar with the industry or business which you’re buying. Many buyers start out with no clear understanding of the type of business they would like to own, and wind up doing research on the fly. Buyers should research industries that they are interested in to determine future potential, while avoiding contracting markets.

The three tips to keep in mind as you look for the right business to purchase are:

1. Find an Industry with Potential

While you may pay more for a business in an industry with high multiples, it’s also more likely to hold its value. This means that when you’re ready to sell the business in the future you should still be able to get a higher sales price for it, especially if you choose an industry with high future growth potential.

2. Ask for Seller Financing

Seller financing is when the seller gives you a loan for part of the purchase price. This can lower the financing amount you need to close the transaction, and you’ll typically get it at a cheaper cost than you would if you received a business acquisition loan for the whole purchase price. Seller financing is common for small business transactions, but you should determine early on in the process whether or not it’s available from the seller.

3. Hire a Business Broker

Hiring a business broker is not quite like hiring a real estate agent. Brokers are compensated by the seller, and may not have an incentive to work with buyers directly, preferring instead to let buyers choose the listings they’re interested in. This doesn’t mean brokers will not work with buyers, but rather that they may not be well suited to show the buyer listings that make sense, as they typically list only a small handful of businesses.

A good business broker can also access many more business opportunities than you can by yourself due to their experience and extensive network. A good place to start is with a nationwide business broker network, where listings are shared between brokers across the country. Some brokers may charge an upfront fee for assisting buyers, and in return provide valuation and negotiation services in addition to help finding the right business.

Pros and Cons of Using a Business Valuation Calculator

Using a business valuation calculator is a fast and simple way to get a ballpark value of a business without hiring an expert and with minimal effort; however, it’s not without its disadvantages. Our business valuation calculator doesn’t factor in tangible and intangible assets which can both significantly impact a business’s actual value.

Some of the pros of using a business valuation calculator are:

• Quick and simple: A business valuation calculator can be used as a quick and easy tool to ballpark a business’s value, which can be especially useful when comparing many like businesses to each other.
• Valuation varies by industry: Most business valuation calculators include an average industry multiple in the calculation, which is useful as not all industries have the same risks and opportunities, which can significantly impact a business’s value.
• Based on revenue and profits: By focusing on actual revenues and profits generated by a business, our valuation calculator is based on a business’s bottom line, which is how much money a business generates notwithstanding assets and liabilities.

Some of the cons of using a business valuation calculator are:

• Doesn’t include assets: Our valuation calculator excludes tangible and intangible assets, which can make up a significant portion of the actual value of a business in asset-heavy industries. It should be combined with a valuation method that includes assets.
• Not a market-based approach: For some businesses, bullish market trends may indicate a much stronger valuation. Conversely, for businesses operating in a contracting market, this approach may overinflate the value of the business’s future revenues.
• Excludes expert analysis: The biggest flaw in any math-based valuation method is the absence of expert analysis. No two businesses are exactly alike, and a math-based calculation ignores factors like intangible assets and year-over-year growth.

Bottom Line

The most important thing in a business acquisition, whether you’re a buyer or a seller, is to arrive at a fair price for the business. This involves several factors not taken into account by a business valuation calculator, however, it can serve as a good starting point. From there you will want to choose a detailed valuation method and determine whether to hire an expert or perform the valuation yourself.

About the Author

Find Robert On LinkedIn

Robert Newcomer-Dyer

Robert has over 15 years of experience in sales leadership, finance, and business development. He recently spent six years leading a team of small business financing professionals, facilitating the deployment of critical capital to over 9,000 small businesses across the US.

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The Importance of Business Valuation

Business owners spend considerable time and energy trying to enhance company value by developing growth plans with well-defined goals.  These plans are designed to maximize value over time, but it’s hard to achieve those goals without knowing where to begin.

Not only do owners need to understand what their business is worth today, they also need to know what supports and drives that value.   Far too often, owner overconfidence or apathy causes this step to either be neglected or downplayed, or at a minimum, based on incomplete data or conjecture.  In this case, a valuation usually serves as a reality check for owners with a biased or uninformed viewpoint on what their business is worth.

Why would a business owner want a valuation? 

The traditional answer is that valuations are needed to resolve tax or legal issues.  However, valuations are actually performed for a myriad of reasons, including but certainly not limited to selling or acquiring a business.  In the cases of death, disability, disaster or divorce, valuations are needed to equitably determine the business assets according to terms spelled out in legal filings.

Valuations are often needed when gifting or donating company stock as part of a charitable contribution, in resolving IRS or shareholder disputes, or when converting a C-corporation to an S-corporation.  There could be requirements in a buy/sell, partnership or shareholder agreement that necessitates a business valuation.

In addition, owners would generally perform a valuation when attempting to raise strategic capital or obtaining a Small Business Association (SBA) loan.  Implementing an Employee Stock Ownership Plan (ESOP) would certainly necessitate an initial and annual valuation.

Moreover, a formal business valuation can help to reconcile perceived opinions on value, and coupled with a marketability analysis, it can help a business owner determine relative value in the marketplace.

How does the business valuation process work? 

The assessment of value is indeed an art form as much as it is a science.  Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business.  An accurate valuation of a closely held business is an essential tool for a business owner to assess both opportunities and opportunity costs as they plan for future growth and eventual transition.  It provides either a point-in-time assessment of relative value for an owner, or perhaps the price a buyer would be willing to acquire the business.

On its face, business valuation is actually a relatively simple and straightforward concept.  A qualified professional first analyzes the subject company’s financial statements and considers comparable transactions, industry ratios and other quantitative and qualitative information.  Then, applicable adjustments are made to align the subject company to an industry standard or benchmark.  The result is a reasonable assessment of fair value, usually performed under the  Uniform Standards of Professional Appraisal Practice (USPAP).

Despite the benefits, however, many business owners are apprehensive about what to expect when going through the valuation process.  In some cases, valuations can expose areas of the business which actually take away from value, such as weak financial and accounting controls, under-performing assets and weaker operating ratios relative to its peer group.   The entire valuation process can provide an overview of strengths and weaknesses of the reviewed company.

What are the key considerations for the business valuation?

The business valuation professional will first consider the purpose and objective of the valuation.  They will then look at the nature and background of the business, its products and services, as well as the industry life cycle, economic and political environment.  Unique factors are then considered, including customer relationships, executive compensation, as well as excess assets, working capital, and liabilities.

Considerations which could have a profound influence on value include goodwill or other intangible assets, the dependency on an owner or key employee(s), diversity of the customer base, market position and the competitive landscape of the industry.

There are three widely accepted fundamental methods used in valuing closely held business interests, the asset, income, and market approach.  The methods most useful in determining final value will depend on several factors, including the purpose of the valuation and the type of company being valued.

What are the Exit & Estate planning considerations for retirement?

A business valuation is an essential component of the estate and tax planning process for owners and their families.  Since the value of the business often accounts for the bulk of the owner’s net worth, determining a reasonable value is not only critical to retirement planning following the exit from the business, but also the groundwork required to both protect and transfer that wealth to the next generation.

Statistics suggest that most owners don’t do business planning or even plan for their own exit, and as a result, many transactions leave sellers feeling somewhat unfulfilled.  If used correctly, however, a thorough valuation can provide that very important starting point in strategic growth planning, as well as some important visibility for an owner contemplating the long term.  It can also serve as a meaningful tool as part of a business “gap analysis” to help identify and eliminate the various anchors to value growth during the exit planning process.  A valuation incorporated into a comprehensive business assessment should yield higher business growth over time, as well as higher terminal values and selling prices.

Jeffrey Elder, MBA – IBBA Certified M&A advisor, Texas Certified Business Broker, International Business Exchange, Austin Texas

Eric C. Boyce, CFA – Chief Executive Officer, BKA Business Consulting, LLC, Cedar Park, Texas (home of the  BizVue tm  Five Pillars of Value Business Assessment platform)

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Business Valuation is a comprehensive process used to determine the economic value of a whole business or company unit, based on factors like its asset value, market position, and future earnings potential.

A business valuation involves assessing various elements of the business to estimate its selling price or value for different purposes, such as investment analysis, business sales, or mergers and acquisitions. For entrepreneurs and business owners, understanding business valuation is key to making informed decisions about their company’s future and financial health.

Valuation Methods

Asset-based approach (also known as book valuation).

The Asset-Based Approach, often referred to as “Book Valuation,” focuses on the value of a company’s assets. It involves totaling the value of all the company’s tangible and intangible assets and then subtracting its liabilities. This approach is most applicable to companies with significant physical assets.

Income Approach (Also Known as Discounted Cash Flow (DCF) Analysis)

The Income Approach, frequently termed as “Discounted Cash Flow (DCF) Analysis,” estimates a company’s value based on its expected future cash flows. These cash flows are then discounted back to their present value, using a discount rate that reflects the risk of the cash flows. This method is particularly useful for companies with stable and predictable cash flows.

Market Approach

The Market Approach values a company by comparing it to similar companies that have been sold or are publicly traded. This approach is especially relevant for businesses operating in industries with a large number of comparable companies and transactions.

Hybrid Approach

A Hybrid Approach combines elements of the asset-based, income, and market approaches to provide a more comprehensive valuation. This method is particularly useful when each individual approach has limitations due to the unique characteristics of the business being valued. For instance, a business might have significant physical assets (favoring an asset-based approach), stable cash flows (suitable for the income approach), and comparable companies in the market (aligning with the market approach). By integrating these methods, the hybrid approach offers a balanced and nuanced valuation, considering multiple facets of the business’s value.

Application in Business Valuation

In practice, the choice of valuation method depends on the nature of the business, the purpose of the valuation, and the availability of data. For instance, startups with limited financial history might not find the income approach as effective, whereas established companies with significant physical assets might lean towards the asset-based approach. The hybrid approach can be particularly useful in complex valuation scenarios where a single method may not capture the full picture of a company’s value.

Using a combination of these methods can provide a more rounded and accurate estimation of a company’s worth, essential for strategic decision-making, investment analysis, and transactions such as mergers and acquisitions.

Valuation Professionals:

Certified Valuation Analysts (CVAs), Accredited Senior Appraisers (ASAs), and other valuation professionals play a crucial role in the business valuation process. They provide expertise, objectivity, and standardized methods to ensure a fair and accurate valuation, especially in complex scenarios or legal proceedings.

Frequently Asked Questions

• When should a business consider getting a valuation?

A business should consider getting a valuation in several scenarios, such as when contemplating a sale or merger, seeking investment, planning for taxes, or during legal proceedings involving asset division. It’s also useful for strategic planning and understanding the financial growth or trajectory of the company.

• How can the choice of valuation method impact the estimated value of a business?

The choice of valuation method can significantly impact the estimated value of a business as each method focuses on different aspects of value. For instance, the asset-based approach might yield a different value compared to the income or market approach, as it focuses on tangible assets rather than earnings potential or market comparables. The appropriate method depends on the nature of the business and the purpose of the valuation.

• Why is it important to engage professional valuation services?

Engaging professional valuation services is important to ensure accuracy, objectivity, and compliance with legal and financial standards. Professional valuators have the expertise to apply the most suitable valuation methods and consider all relevant factors, resulting in a more reliable and credible valuation. This is especially crucial in high-stakes situations like legal disputes, significant business transactions, or complex financial planning.

• What is a valuation multiple and how is it used in business valuation?

A valuation multiple is a financial metric used to estimate a business’s market value relative to a key financial statistic, such as earnings, sales, or assets. Common examples include price-to-earnings (P/E) ratio, enterprise value-to-sales (EV/Sales), and enterprise value-to-EBITDA (EV/EBITDA). These multiples are derived from market comparisons and are used to value a business by applying the multiple to the corresponding financial metric of the business being valued. They are particularly useful in the market approach to business valuation.

• Can a brand-new company be valued, and what factors contribute to its valuation?

In most cases, a brand-new company without operational history or financials may not have a significant established value. However, its potential value can be determined based on factors such as the entrepreneur’s experience, the uniqueness of the business idea, market potential, intellectual property, and anticipated future cash flows. While it’s challenging to assign a concrete value to a new company, these factors can provide investors or founders with an initial estimation of its potential worth.

• How is the valuation of a brand-new company typically determined?

The valuation of a brand-new company is often determined by projecting its future cash flows and then discounting them to their present value using an appropriate discount rate (as in the Discounted Cash Flow Analysis). This method is predicated on the expectation that the company will generate positive cash flows in the future. Other factors, like market demand for the product or service, the strength of the business plan , and the experience of the management team, also play a crucial role in this valuation process. For very early-stage companies, valuation may also be influenced by comparable transactions in the industry or by the amount of capital the founders need and the amount of equity they are willing to give up.

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How to Write a Business Plan: Your Step-by-Step Guide

So, you’ve got an idea and you want to start a business —great! Before you do anything else, like seek funding or build out a team, you'll need to know how to write a business plan. This plan will serve as the foundation of your company while also giving investors and future employees a clear idea of your purpose.

Below, Lauren Cobello, Founder and CEO of Leverage with Media PR , gives her best advice on how to make a business plan for your company.

Build your dream business with the help of a high-paying job—browse open jobs on The Muse »

What is a business plan, and when do you need one?

According to Cobello, a business plan is a document that contains the mission of the business and a brief overview of it, as well as the objectives, strategies, and financial plans of the founder. A business plan comes into play very early on in the process of starting a company—more or less before you do anything else.

“You should start a company with a business plan in mind—especially if you plan to get funding for the company,” Cobello says. “You’re going to need it.”

Whether that funding comes from a loan, an investor, or crowdsourcing, a business plan is imperative to secure the capital, says the U.S. Small Business Administration . Anyone who’s considering giving you money is going to want to review your business plan before doing so. That means before you head into any meeting, make sure you have physical copies of your business plan to share.

Different types of business plans

The four main types of business plans are:

Startup Business Plans

Internal business plans, strategic business plans, one-page business plans.

Let's break down each one:

If you're wondering how to write a business plan for a startup, Cobello has advice for you. Startup business plans are the most common type, she says, and they are a critical tool for new business ventures that want funding. A startup is defined as a company that’s in its first stages of operations, founded by an entrepreneur who has a product or service idea.

Most startups begin with very little money, so they need a strong business plan to convince family, friends, banks, and/or venture capitalists to invest in the new company.

Internal business plans “are for internal use only,” says Cobello. This kind of document is not public-facing, only company-facing, and it contains an outline of the company’s business strategy, financial goals and budgets, and performance data.

Internal business plans aren’t used to secure funding, but rather to set goals and get everyone working there tracking towards them.

As the name implies, strategic business plans are geared more towards strategy and they include an assessment of the current business landscape, notes Jérôme Côté, a Business Advisor at BDC Advisory Services .

Unlike a traditional business plan, Cobello adds, strategic plans include a SWOT analysis (which stands for strengths, weaknesses, opportunities, and threats) and an in-depth action plan for the next six to 12 months. Strategic plans are action-based and take into account the state of the company and the industry in which it exists.

Although a typical business plan falls between 15 to 30 pages, some companies opt for the much shorter One-Page Business Plan. A one-page business plan is a simplified version of the larger business plan, and it focuses on the problem your product or service is solving, the solution (your product), and your business model (how you’ll make money).

A one-page plan is hyper-direct and easy to read, making it an effective tool for businesses of all sizes, at any stage.

How to create a business plan in 7 steps

Every business plan is different, and the steps you take to complete yours will depend on what type and format you choose. That said, if you need a place to start and appreciate a roadmap, here’s what Cobello recommends:

1. Conduct your research

Before writing your business plan, you’ll want to do a thorough investigation of what’s out there. Who will be the competitors for your product or service? Who is included in the target market? What industry trends are you capitalizing on, or rebuking? You want to figure out where you sit in the market and what your company’s value propositions are. What makes you different—and better?

2. Define your purpose for the business plan

The purpose of your business plan will determine which kind of plan you choose to create. Are you trying to drum up funding, or get the company employees focused on specific goals? (For the former, you’d want a startup business plan, while an internal plan would satisfy the latter.) Also, consider your audience. An investment firm that sees hundreds of potential business plans a day may prefer to see a one-pager upfront and, if they’re interested, a longer plan later.

3. Write your company description

Every business plan needs a company description—aka a summary of the company’s purpose, what they do/offer, and what makes it unique. Company descriptions should be clear and concise, avoiding the use of jargon, Cobello says. Ideally, descriptions should be a few paragraphs at most.

4. Explain and show how the company will make money

A business plan should be centered around the company’s goals, and it should clearly explain how the company will generate revenue. To do this, Cobello recommends using actual numbers and details, as opposed to just projections.

For instance, if the company is already making money, show how much and at what cost (e.g. what was the net profit). If it hasn’t generated revenue yet, outline the plan for how it will—including what the product/service will cost to produce and how much it will cost the consumer.

5. Outline your marketing strategy

How will you promote the business? Through what channels will you be promoting it? How are you going to reach and appeal to your target market? The more specific and thorough you can be with your plans here, the better, Cobello says.

6. Explain how you’ll spend your funding

What will you do with the money you raise? What are the first steps you plan to take? As a founder, you want to instill confidence in your investors and show them that the instant you receive their money, you’ll be taking smart actions that grow the company.

7. Include supporting documents

Creating a business plan is in some ways akin to building a legal case, but for your business. “You want to tell a story, and to be as thorough as possible, while keeping your plan succinct, clear, interesting, and visually appealing,” Cobello says. “Supporting documents could include financial projects, a competitive analysis of the market you’re entering into, and even any licenses, patents, or permits you’ve secured.”

A business plan is an individualized document—it’s ultimately up to you what information to include and what story you tell. But above all, Cobello says, your business plan should have a clear focus and goal in mind, because everything else will build off this cornerstone.

“Many people don’t realize how important business plans are for the health of their company,” she says. “Set aside time to make this a priority for your business, and make sure to keep it updated as you grow.”

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How to Write a Business Plan Conclusion?

• Vinay Kevadia
• June 20, 2024

Completed writing your business plan?

Let’s wrap it up with a conclusion that ends your business plan on an exciting and positive note. Not to forget—a conclusion that convinces the readers about your business’s potential to succeed.

In this blog post, you will learn exactly how to write a conclusion of a business plan and get an example to guide you.

Let’s get started.

What is a business plan conclusion?

A business plan conclusion is the final section concluding very concisely the points discussed in your business plan.

It reinforces the business’s strengths and feasibility and reassures the readers of potential business success. It clarifies the reader’s benefit of associating with your business and convinces them of a profitable investment opportunity.

A conclusion is about 3-4 paragraphs long and is designed to drive action and leave a lasting impression on reader’s minds.

Business plan conclusion vs. executive summary

Many people confuse a conclusion and an executive summary to be the same. However, they are not. Let’s see how.

• An executive summary is a broad overview of your entire business plan. The conclusion, on the other hand, is a concise summary reinforcing the key takeaways of your plan.
• While an executive summary introduces the readers to your business idea, a conclusion convinces them to take the desired action.
• An executive summary is a preview of what the plan will be about. The conclusion, on the contrary, is a review of what the plan has discussed.
• An executive summary is concise. However, conclusions are more concise covering only the aspects that can drive decisions and actions.

Clear enough, right? Let’s move ahead.

Why is a business plan conclusion important?

Although a conclusion is not mandatory, it is an important aspect of a business plan. It communicates your passion and commitment to a business idea and convinces the readers of your ability to succeed.

A conclusion synthesizes the key insights of your business plan focusing on aspects such as market analysis, business strategy, competitive advantage, and milestones. It reinforces your plan’s vision and establishes your strategic position amongst readers.

A well-crafted conclusion will drive desired actions from the readers. It can seal the deal and fulfill your objective of writing a business plan .

How to write a conclusion for your business plan?

From what information to include to where to place the conclusion—this section will guide you to write an impactful conclusion for your business plan.

1. Choose the right placement

There are two places for you to place your conclusion. It can either be after your executive summary or at the end of the document.

The location changes depending on who you plan to present your business plan with.

If you prepare a business plan for investors , placing your conclusion after the executive summary will increase the likelihood of it getting read.

However, the conclusion should be placed at the end for business plans that are prepared for internal use and business partners. Conclusion in this case reviews and emphasizes the company’s strengths.

2. Place the right information

The information in your conclusion changes depending on your audience and the intent of the business plan.

For instance, if you’re a new business trying to secure funds, your conclusion can synthesize the key details about the following:

• Funding demands
• Benefit to the investors
• Target market and target customers
• Solution for the problem
• Marketing strategy
• Team members and their expertise
• Financial projections
• Competitive advantage
• Launch plan

However, if you’re a small business trying to grow or use this plan for internal use, consider covering key insights from the following aspects:

• Mission statement
• History and the milestones
• Data supporting growth
• Industry trends
• Financial summary
• Long-term goals and objectives

These are the details you can cover while writing your conclusion. However, including every bit of these in your conclusion is unnecessary.

Think from your reader’s perspective. Determine the information that would excite them about your business and form your conclusion accordingly.

3. Include stats and visuals

Now that you’ve decided on the placement and information to be included in your conclusion, it’s time to make your conclusion zesty.

How? Get the facts and stats that would support the claims you make in your conclusion.

For instance, if you’re promising growth, show market research that supports your claim. Again, if you’re promising a certain return on investment, include the statistics that can make investors believe you.

Sway away from vague statements and assumptions. And, if you feel that the statistic would be best absorbed through visual charts or graphics, don’t be afraid to add one.

4. Add a CTA

If you want the readers to take action, guide them. Add a crisp clear call to action(CTA) and explain how the readers would benefit from taking that action.

For instance, 

• Join us as a silent partner by investing in Beanco.
• Invest $2 M and secure a 20% stake in equity.
• Support our growth by sharing references.

Don’t beat around the bush. If you are making a funding request, be unapologetic. And even if not, your CTA should suggest how a reader can support your growth.

5. Review and proofread

Once your conclusion is ready, re-read and proofread it for any grammatical or spelling errors. Fix the flow and remove fluff to make your conclusion crisp and persuasive.

Get your friends and business partners to read the conclusion and check if the message you are trying to send is crisp and clear. If not, make the necessary adjustments.

Business plan conclusion example

Use this business plan conclusion as a reference and tailor yours keeping in mind the needs, objectives, and audience for your business plan.

Launching EcoRide Electric Scooters will revolutionize urban transportation by providing an eco-friendly, efficient, and affordable solution for city commuters. Our innovative design and advanced technology will set us apart in the rapidly growing market for sustainable transport options.

We are poised to make a significant impact on urban mobility, and we want [Investor’s Name] to be a foundational part of our journey. By investing in EcoRide Electric Scooters, [Investor’s Name] will benefit in the following ways:

• Joining a groundbreaking startup with a vision to reduce urban pollution and traffic congestion, led by a passionate team with over 20 years of combined experience in the automotive and tech industries.
• Supporting the development and deployment of cutting-edge electric scooters, contributing to a cleaner, greener urban environment.
• Gaining equity in a high-potential startup with a scalable business model and the potential for significant returns as we expand to new markets.

Together, we can transform urban transportation, reduce carbon footprints, and create a sustainable future for city dwellers. If you share our vision for a cleaner, more efficient urban commute, partner with us.

Let’s conclude your business plan

Now that you have understood the process and referred to an example, let’s conclude your business plan.

Identify the information you must highlight, encapsulate it into a powerful conclusion, and pair it with an even more powerful CTA.

However, remember that the conclusion just seals the deal. It’s the business plan that will hook your readers till the end. With Upmetrics’s AI business plan generator , you can create truly engaging business plans in just about 10 minutes.

So, improvise your business plan, sum it up with a convincing conclusion, and send over your business plan to your potential investors to secure funding.

Build your Business Plan Faster

with step-by-step Guidance & AI Assistance.

Frequently Asked Questions

How long should a business plan conclusion be.

A conclusion of your business plan can be anywhere between 2-3 paragraphs long. In this ideal length, you must outline the key takeaways of your plan, clarify the next step to the readers, and explain to them the benefit of supporting your business.

What is the most important part of a business plan conclusion?

A CTA is the most important part of the conclusion, especially if you are trying to raise funds. However, if you are writing a plan for internal purposes, focus more on synthesizing the key essentials of a plan.

Can I include new information in the conclusion?

A conclusion does not introduce any new information. It simply reinforces the business’s position and convinces the readers to take the desired action for one last time. For instance, offer funding for your business.

Is it necessary to include a call to action in the conclusion?

It is very important to add a crisp clear CTA while concluding your plan. You can’t expect the readers to invest in your business or help you grow if you don’t clarify the steps to take action.

About the Author

Vinay Kevadiya

Vinay Kevadiya is the founder and CEO of Upmetrics, the #1 business planning software. His ultimate goal with Upmetrics is to revolutionize how entrepreneurs create, manage, and execute their business plans. He enjoys sharing his insights on business planning and other relevant topics through his articles and blog posts. Read more

Reach Your Goals with Accurate Planning

• Best Budgeting Apps

Compare the Top Budgeting Apps

• Budgeting App Reviews
• Introduction
• Features to Look for
• How to Choose an App
• Setting Up and Using an App
• Pros and Cons
• Alternatives
• Why You Should Trust Us

Best Budgeting Apps of July 2024: Manage Your Finances Efficiently

Affiliate links for the products on this page are from partners that compensate us and terms apply to offers listed (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate products and services to help you make smart decisions with your money.

Budgeting can already feel difficult, but with the right money management tool, you should be able to track your spending habits, find ways to spend less and save more, or budget effectively as a couple.

50% off for new customers (offer ends July 14, 2024)

$3.99 monthly subscription or $47.88 annual subscription

• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Connect all your bank accounts, investments accounts, and credit cards
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Help you save for individual savings goals
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Create a budget
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Track expenses
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. 30-day money-back guarantee
• con icon Two crossed lines that form an 'X'. Must buy a subscription (no free option)

Quicken Simplifi is a great budgeting tool if you want to create a detailed monthly spending and savings plan and don't mind paying for a subscription. If you would rather get a budgeting app that doesn't have a subscription fee, you'll have to consider other options.

• Up to 50% off on Simplifi for all new customers
• Stay on top of your finances in under 5 minutes per week.
• Check your custom budgeting plan — anytime, anywhere!
• Track your spending
• See where your money is going and discover places to save.
• Keep your bills in check
• Find subscriptions you don't use and start saving from day one.

Check out our picks for the best budgeting apps, and read more about how we chose the winners.

Best Budgeting Apps of July 2024

• Rocket Money : Best overall for reducing spending and creating a budget
• Monarch Money : Best for saving toward financial goals
• Quicken Simplifi : Best for robust budgeting features
• Honeydue App: Best for couples

The top budgeting apps have a straightforward sign-up process, a decent fee structure, strong budgeting tools, and an overall positive user experience. Learn more about the best budgeting apps, below.

Free to create a budget. Subscription fee applies to premium services.

• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Connect all your bank accounts, credit cards, and investment accounts to track spending
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Bill negotiation feature
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Free plan available
• con icon Two crossed lines that form an 'X'. Limited features available with free plan
• con icon Two crossed lines that form an 'X'. Limited customer support availability

Rocket Money is featured in our best budgeting apps guide. While the Rocket Money app is free, there is a subscription fee if you want to use Premium features, like concierge services or premium chat.

Offers a 7-day free trial

Premium Plan with a 7-day free-trial, then $14.99 per month or $99.99 annually

• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Link bank accounts
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Create unlimited budgets and make customizable categories
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Track individual savings goals
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Graphs and charts that track your spending and savings
• con icon Two crossed lines that form an 'X'. No free plan

Monarch Money is an overall solid option if you prioritize creating monthly budgets and saving for individual savings goals. The main downside of the app is that it doesn't offer a free plan. You'll have to a monthly or annual subscription fee.

• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Budgeting app for couples
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Can have individual and shared finances
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Create monthly bill reminders
• Check mark icon A check mark. It indicates a confirmation of your intended interaction. Can discuss finances through chat feature
• con icon Two crossed lines that form an 'X'. Only available through mobile app

Honeydue is featured in our best budgeting apps guide as the best option for couples. It's a great option if you don't want to pay a fee. It also allows you to have individual and shared finances.

Top Budgeting App Reviews

Budgeting looks different for everyone, so we selected four picks for budgeting apps. We selected a well-rounded budgeting app, one designed for couples, another that's appealing for setting goals, and lastly one with more detailed budgeting features.

We have a mix of free budgeting apps and ones that have premium plans with subscription fees, so you can choose an option based on your financial needs and priorities.

Best Overall: Rocket Money

Rocket Money (previously known as TrueBill) is our best budgeting app overall because it has a variety of tools to help you save and limit spending.

Rocket Money has both a free plan and a premium plan. With the free plan, you'll be able to link bank accounts, credit cards, and investment accounts to track spending and you'll also be able to create a budget .

The premium plan includes concierge services, which review your bills and subscriptions to help you cancel or get refunds for these services on your behalf. It also includes premium customer chat, unlimited budgets, customizable budget categories, a savings account, real-time updated syncing, and a credit score report.

The app's standout feature is Bill Negotiation. You'll upload a copy of your bill, and Rocket Money will determine whether you can get the same service with the company for a lower price. Rocket Money may also help you get refunds if you're charged bank overdraft fees or late fees.

When Rocket Money negotiates a bill, you'll have to pay a percentage (you may choose any amount from 30% to 60%) of whatever it will save you for the year. If you plan to change your internet, cable, phone, or wireless provider in the next year, you could end up losing money, though.

Pricing: You may choose how much to pay each month through a sliding scale. Rocket Money has a free plan that's $0. The Premium plan has a 7-day free trial; after the free trial, you'll have to pay around $6 to $12 per month (the lower-price plans are billed annually instead of monthly).

Rocket Money Review

Best for Couples: Honeydue App

Honeydue is a budgeting app designed specifically for couples. The sign-up process is short and simple — you'll create an account by setting up your email, then invite your partner to Honeydue.

Honeydue allows you to see both your individual and shared finances in one place. You also have to option of setting limits to how much your partner can see. When you connect a bank account to the app, you may choose to share both balance and transaction information, share information only, or share no information.

With Honeydue, you can organize your finances by creating monthly bill reminders or discussing personal financial information through the app's chat feature.

If you would like an additional place to store money for a common goal, like a holiday budget or a couple's vacation.

You won't be able to access Honeydue through your computer; it's only available through a mobile app. Some of our other top picks have both online and mobile platforms for more convenience.

Regular Pricing: Free

Best for Saving for Financial Goals: Monarch Money

Monarch Money may be worthwhile if you are looking for a budgeting app that helps you save for financial goals and create a budget. It's also become one of the most hyped-up Mint alternatives among Redditor users since Mint shut down.

Through Monarch Money, you'll be able to make unlimited personalized savings goals . You can customize goals, organize them by order of importance, and link them to bank accounts. The app also helps you create a zero-based budget, track your net worth, and analyze your cash flow.

Monarch Money doesn't have a free plan. You can try out a 7-day free trial. However, after that, you'll need to pay a subscription fee. If you do not want to pay a subscription fee for a budgeting app, you'll want to consider one of our other picks.

Regular Pricing: Premium Plan with a 7-day free-trial, then $14.99 per month or $99.99 annually

Best for Robust Budgeting Features: Quicken Simplifi

Quicken Simplifi might be a good choice if you want a budgeting app that provides a detailed breakdown of your spending and savings.

In addition to letting you create budgets with customizable categories and make individual savings goals, Quicken Simplifi analyzes your spending and savings through charts and data.

You can receive monthly reports for spending, general income, income after expenses, savings, and net worth . You can also now check your credit score through the web application if you have early access (This feature is currently only available to U.S. residents). Checking your credit score through Simplifi won't affect it.

The one major downside to this app is that it doesn't have a free plan. You'll have to pay a subscription fee, although you can try the app for 30 days with a money-back guarantee.

There's also a special promotion available right now — 50% off for new customers (offer ends July 14, 2024).

Regular Pricing: $3.99 monthly subscription or $47.88 annual subscription

Quicken Simplfi Review

Budgeting App Trustworthiness and BBB Ratings

We review the ethics of each company so you can see if a specific financial institution aligns with your values.

We also include the settlement history of the last 3 years so you're aware of any recent public controversies involving the bank.

We include ratings from the Better Business Bureau to evaluate how companies address customer issues and handle transparency.

Rocket Money has a B rating due to a high volume of customer complaints.

Honeydue has an F rating because it hasn't responded to three customer complaints and it hasn't been in operation for a long time.

Quicken has an F rating because it has received a high volume of customer complaints filed, and failed to respond to 13 customer complaints.

A good BBB rating won't guarantee you'll have a good relationship with a company. You also might want to read customer reviews or talk to current customers before making your decision.

Intuit does have some public issues surrounding its tax-filing software, TurboTax.

Introduction to Budgeting Apps

Why use a budgeting app.

A budgeting app can help you understand where you spend your money. It's also useful for building and maintaining an effective budget.

The top budgeting apps let you create a monthly budget using customizable categories.

Many also help you save money effectively . For example, budgeting apps use your transaction history to make charts and graphs. You can use this information to analyze your spending patterns and figure out where to make adjustments in your budget.

Key Benefits of Budgeting Apps

The primary benefit of using a budgeting app is that it gives you a big-picture view of your financial situation.

Many budgeting apps let you link different types of bank accounts, investment accounts, credit cards , and loans. You'll be able to see all your accounts in one place and see how you're spending versus saving.

Budgeting apps also help you build better money habits. If you've struggled to maintain a budget in the past, it might be easier to track your spending on an app than completely on your own. Budgeting apps do the work for you by syncing all your accounts — you just need to make sure everything is synced correctly and make small adjustments when they aren't.

Features to Look for in a Budgeting App

User-friendly interface.

A good budgeting app has a design format that's easy to use. The app should load quickly and make it easy to get started. You should be able to create a budget on your own without much help. If you encounter technical difficulties, you should also easily be able to contact a customer representative through the app.

Syncing with Bank Account

Many easy-to-use budgeting apps for beginners allow you to sync savings accounts, checking accounts , investment accounts, or credit cards.

Apps often use Plaid to link bank accounts. Plaid can connect more than 11,000 U.S. banks and credit unions, including the best banks .

Expense Tracking

Once bank accounts are linked, your spending will be updated on the app so you have up-to-date information. A strong budgeting app will provide updates frequently, and during the same day so you can stay on top of your budget.

Customizable Budgeting Categories

Many budgeting apps allow you to create a zero-balance budget. With a zero-balance budget, you're figuring out where every dollar of your income is going. You can create budget categories for every expense. You can also create savings goals if you're setting aside money for a specific purpose, like a down payment on a home or a future vacation.

A good budgeting app allows you to make customizable budgeting categories rather than pre-set categories. That way, you can make a budget that's tailored to your life and make categories as broad or specific as you want.

Charts and Visual Analysis Features

A top budgeting app analyzes your habits so you can see how you manage your money over time. Some apps provide charts of your monthly budget so you can see how your categories compare to one another. Others might have visuals to indicate how much money you have left to spend in a certain category for that month.

Several budgeting apps also provide reports for broader areas of your finances. For example, you might be able to view your cash flow balance over several months or how your money in your retirement plans has grown over time.

How to Choose the Best Budgeting App for You

To find the right budgeting app, you need to know what features you're looking for. Are you looking for ways to cut back on spending? Do you want a free plan or a subscription plan for your budgeting app? Do you want a detailed breakdown of your finances or more of a general overview? Knowing the answers to these questions can help narrow down your options.

If you have your eye on a few budgeting apps, you can try out the free trials or free versions of each before settling on the right one. That way, you can see if the interface is also user-friendly and manageable for the long-term.

Setting Up and Using a Budgeting App

Step-by-step guide to setting up your budgeting app.

To use a budgeting app, you'll have to download it through the Android or Apple store. To set up most budgeting apps, you'll enter your name and email address. If the app charges a subscription fee, it will prompt you to sign up for a plan or free trial.

The best budgeting apps will walk you through the app's different features and help you get started. You'll typically be prompted to link accounts. Then, you can create a budget or set savings goals.

Tips for Effective Budgeting with the Apps

If you're new to budgeting apps, it may be helpful to start off with some structure.

For example, you could use a popular savings method like the 50/30/20 rule or pay-yourself-first strategy.

The 50/30/20 rule breaks down your budgeting, so 50% goes to needs, 30% goes to wants, and 20% goes to debt or savings. The pay-yourself-first strategy focuses on savings — you'll automatically transfer money from your paycheck to some of your savings and then distribute what's left over to your expenses.

Another tip for effective budgeting is to look at your expenses to see if they reflect your financial goals and values. If you have certain goals that are of higher priority than others, find ways to reduce spending in categories that aren't a priority for you. That might mean waiting before making a purchase, creating a meal plan or grocery list to limit spending on food, or auditing your subscriptions to see if there are any you can cancel.

Common Mistakes to Avoid on Budgeting Apps

Experts recommend trying out a budgeting app's free plan or free trial before committing to an annual plan.

There are many budgeting apps out there, so you want to try to find the one that best aligns with your financial needs. Testing a few apps can help you decide the best one, and it also keeps you from paying too much for a budgeting app that you won't end up using.

Pros and Cons of Budgeting Apps

Alternatives to Budgeting Apps

Budgeting apps vs. spreadsheet or diy budgeting methods.

You may prefer building a spreadsheet budget if you don't want to link all of your bank accounts or credit cards in a mobile app. However, setting up and maintaining your budget will primarily hinge on how much work you're willing to put into it.

A budgeting app does the tracking for you. With a spreadsheet, you'll have to either start from scratch or use a template. Either way, a budgeting app still offers more comprehensive features.

Budgeting Apps vs. Personal Finance Software

Budgeting apps and personal finance software share the same features. The best option for you will depend on whether you have preferences on the tool's accessibility.

A budgeting app is primarily designed for mobile experiences. Some apps also have an online dashboard which you can access through your computer, but it is always something that's offered.

Meanwhile, personal finance software is designed for computer access. You'll either download the software to a desktop or use an online platform. Some will also have apps, but some features might not be available.

Budgeting Apps vs. Savings Accounts with Goals Features

Some of the best online banks have added unique features to their savings accounts to help customers with goal-setting.

If you're specifically looking for a way to save for goals, it may benefit you to get a savings account with buckets . Buckets are customizable tools that separate your savings so you can save for specific goals. Since they are an integrated bank account feature, they also might be easier to manage than a budgeting app.

If you would rather have more robust budgeting tools, a budgeting app will likely still stand out to you. Budgeting apps also connect investment accounts, credit cards, and loans, so you'll be able to see everything in one place.

Budgeting App FAQs

A budgeting app is beneficial for tracking expenses and sticking to a budget. It can also help you save for financial goals and prevent lifestyle creep .

To choose the best budgeting app for your needs, consider what your financial goals are and how a budgeting app can best help you achieve them. If you need help cutting back on expenses, you might consider a budgeting app with bill negotiation features. If you need help with savings, you might prioritize an app that helps with goal-setting features.

Most budgeting apps have encryption to store data, making them secure to use if you're linking your accounts. To keep your username and password safe, budgeting apps might also have multi-factor authentication so they can verify your identity when you're logging in.

A budgeting app can help you understand your financial situation so you can create a budget that saves you money over time. These apps can help you find areas where you can reduce your spending. Some also offer a bill negotiation feature so you can see if you can save money on subscriptions.

Yes, there are free budgeting apps available in the Apple and Android stores, though they typically have more limited features than apps with paid subscriptions. The best free budgeting app is Honeydue, which is specifically for couples.

Mint shut down in March 2024. You'll have to switch to Credit Karma if you want to continue using an Intuit personal finance platform, or you can switch to an alternative budgeting app.

In most cases, the best budgeting app for beginners will be one that makes budgeting easy — this means it has an easy-to-use interface and links to your accounts, so you don't have to enter every transaction manually. It can also be good to have an app that teaches you about money.

Rocket Money is our best budgeting app overall, and it has a free plan. If you're in a couple, our top pick is Honeydue which is also free to download.

Why You Should Trust Us: Experts' Advice on the Best Budgeting Apps

We consulted banking and financial planning experts to inform these picks and provide their advice on finding the budgeting app for your needs.

• Sophia Acevedo, banking editor, Business Insider
• Mykail James, MBA, certified financial education instructor, BoujieBudgets.com

Here's what they had to say about budgeting apps. (Some text may be lightly edited for clarity.)

What should I look for in a budgeting app?

Mykail James, MBA, certified financial education instructor, BoujieBudgets.com :

"My best tip for people who are looking to start using a budgeting app is to figure out what you're missing in your financial system. For example, if you are a person who knows that you want to stick to a zero-based budget, and you've been doing that manually, but you need maybe a little bit more help with the organization, then you can center your focus on searching for apps specifically solve your problem."

Sophia Acevedo, banking editor, Business Insider :

"I would look for features that would help me with my goals. Like if I'm trying to curb spending, I would look for a budgeting app that helps me minimize payments in certain spending areas."

How do I know if a budgeting app is right for me?

Mykail James, MBA, CFEI:

"Give it time. Every budgeting app is going to feel uncomfortable during the first month. Give it at least three months before deciding if it's not something for you. Actively try and use it before considering a switch."

Sophia Acevedo, CEPF:

"I would first try out the free version and see how it works. Some budgeting apps are entirely free, while others have different plans or trials at a variety of price points."

Methodology: How Did We Choose the Best Budgeting Apps?

At Business Insider, we aim to help smart people make the best decisions with their money. We understand that "best" is often subjective, so in addition to highlighting the clear benefits of a financial product, we outline the limitations, too.

First, we compiled a list of 18 popular budgeting apps available in both the Google Play Store and Apple Store.

Then, we reviewed each budgeting app for a week. To determine our top picks, we reviewed the initial sign-up process, pricing, budgeting tools, and user experience. We also considered whether each app accomplished everything it advertised, and how regular users reviewed the product on the Apple and Google Play store.

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Editorial Note: Any opinions, analyses, reviews, or recommendations expressed in this article are the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any card issuer. Read our editorial standards .

Please note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed, or may no longer be available.

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• Get real-time insights from devices, smart cameras, and sensors.

Use Cradlepoint NetCloud Manager for real-time visibility.

• Track device and network health through dashboards, live stat views, and reports.
• Monitor both network and security events from a single pane of glass.

Resources for your business.

73% of MSE IT spend allocated to “keeping the lights on” vs. business transformation.

Learn what Gartner® says Midsize Enterprise (MSE) CIOs must do to improve operational effectiveness and drive innovation.

Get your hardware up and running with our on-site support—at no additional charge.

Receive end-to-end project planning, installation, and support services from our Connected Workplace experts, and enjoy a seamless, on-time deployment.

Got questions?

What is connected workplace.

Connected Workplace is a fully managed, nationwide fixed wireless Business Internet solution with our leading 5G network at its core. As a managed service with end-to-end support, your team can focus on what’s most important for your business—rather than cumbersome, day-to-day connectivity management activities.

How is Connected Workplace different than your Business Internet solution?

Connected Workplace is fast and reliable Business internet plus a variety of key features like professional installation, configuration management, 24x7 monitoring, and more.

How much does it cost?

Our “as-a-service” model means equipment, software licensing, professional installation, and managed services are all included in a simple, straightforward recurring monthly charge per device. Contact one of our experts for more information  here .

Where is Connected Workplace available?

Connected Workplace is available nationwide across our wireless network.

Will you install equipment for my business?

Absolutely. Professional onsite installation is included for all T-Mobile devices provided with Connected Workplace.

What devices are supported with Connected Workplace?

Connected Workplace is available with a broad portfolio of Cradlepoint and Cisco Meraki devices and includes access to intuitive cloud dashboards.

How can I use Connected Workplace?

Use Connected Workplace as a managed, primary connectivity solution for small/satellite offices, retail locations, and elsewhere so you can redirect your business’s talent and resources to more strategic activities.

What security solutions are available with this solution?

We can include a premise-based firewall for enhanced security, and/or a SASE cloud-based security solution as an optional add-on. Learn more about SASE here .

Let’s talk.

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