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Valuing Your Business

Ever wonder what your business is worth? Here are five common methods of calculating it.

Method 1. Assets vs. Liabilities. This method presumes the result of subtracting liabilities from assets is related to the cost of creating an identical business from scratch. The challenge is identifying and placing a value on non-material items like “Good will” and internal processes.

Method 2. Market Comps. This is based on looking around to see what the “going rate” is for businesses of your type. This is as simple as going to business broker websites and searching for businesses similar to yours.

Method 3.  Discounted Future Earnings. This method is based upon “Net Present Value” (NPV) of future earnings. NPV is the reason lottery winners are given the option of taking half the winnings now or a full payout over 20 years. It presumes the proceeds will be invested at some “discounted” rate and the distribution and returns will add up to the jackpot in 20 years.

What is the appropriate discount rate to use for your business? Many buyers will use a “Weighted Average Cost of Capital (WACC)”. This would be the buyer’s interest rate if he/she has to borrow the funds, plus a factor based on the perceived risk. So, discount rates between 10% to 20% are common.

Calculating earnings (profits). For valuing a business, profits are much more than what you expect to pay in business taxes. Consider that your salary is also profit, as are “discretionary expenses” (those not essential to running the business).

An explanation of how to calculate NPV is beyond this article’s scope, but you can go to Google and search for “NPV Calculator”. Also see for a discussion of WACC.

Method 4: Direct Capitalization. The “Capitalization Rate” is a value used to divide a business economic benefit to arrive at the business value. Capitalization rate is related to the discount rate from Method 3 through the following formula:    CR = DR – G , where G is the expected annual long-term growth rate in the business earnings being capitalized. For an explanation and calculator go to

Method 5.  Gross Revenues. Depending on the type of business, its value can be calculated as shown for some typical local businesses:

Eating and Drinking Places / 2X Net Profit or 25 – 35% of annual sales

Beauty Shops / 1.5X Net Profit or 4X mthly sales + inventory

Automotive Repair Shops / 5% of annual sales, 1.5X Net Profit

Business Services / 63% of annual sales

Gift, Novelty, & Souvenir Shops  / 4X mthly sales + inventory or 1.5X Net Profit

Computer Related Services / 57% of annual revenue

Retail Bakeries / 4X mthly sales + inventory, furniture, etc

Insurance Agents, Brokers, and Service / 100% annual commissions

Building Cleaning and Maintenance Services / 50% of annual revenue or 1.5X Net Profit

Sporting Goods Stores and Bicycle Shops / 4X mthly sales + inventory

Auto Body and Upholstery Repair Shops / 35% of annual sales or 1.75X Net Profit

Plumbing, Heating, and Air-Conditioning 24% of annual revenues or 1.5X Net Profit

Source: The Business Reference Guide 2002 tenth edition, by Tom West, 2002.

Written by Keith Larson

Keith is 1 of 6 experienced SCORE volunteers providing FREE business counseling at the new Murrieta Innovation Center 26442 Beckman Ct. To make an appointment, send an e-mail to or visit the SCORE website at Join Keith and other Murrieta-area business owners at a FREE monthly Business Roundtable, held 3rd Wednesdays from 8:00 to 9:00 a.m. at the Innovation Center.

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