How to Calculate Business Valuation

Business valuation estimates what a company is worth using financial metrics and industry benchmarks. The earnings multiplier method is one of the most common approaches.

The Formula

Value = Annual Earnings x Industry Multiplier

Where:

ValueBusiness Value — Estimated worth of the business
EarningsAnnual Earnings — Yearly net profit or EBITDA
MultiplierIndustry Multiplier — Typical multiple for the industry

Step-by-Step Example

Here's how to calculate business valuation step by step:

  1. 1Determine earnings: Calculate annual net profit or EBITDA from financial statements.
  2. 2Find the multiplier: Research the typical earnings multiple for your industry.
  3. 3Multiply: Multiply annual earnings by the industry multiplier for an estimated valuation.

Following these 3 steps gives you the final business valuation value.

Skip the Math

A small restaurant earning $150,000/year with a 3x industry multiplier would be valued at approximately $450,000.

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Why You Need This Calculation

  • Business valuation is essential for selling, buying, securing investment, or estate planning purposes.

Common Mistakes

Using revenue instead of earnings.

Valuation multiples typically apply to net profit or EBITDA, not gross revenue.

Using an outdated multiplier.

Industry multiples change with market conditions; use current data.

Ignoring intangible assets.

Factor in brand value, intellectual property, and customer relationships.

Frequently Asked Questions