As a seasoned business consultant, I‘ve been asked countless times: "What’s the market value of your company?“ or ”How much is your business worth?" These aren‘t just idle questions — they’re crucial to know whether you're considering selling your company or seeking seed funding from investors.
My biggest learning? There‘s no one-size-fits-all approach to valuing a company. However, I’ve found that the time-revenue method is often the most reliable for determining a company‘s maximum value. It’s a method I‘ve used successfully with numerous clients, and it’s particularly useful in today's fast-paced business environment.
In this post, I‘ll share my insider knowledge on the key factors you need to consider when valuing your business and walk you through various calculation methods I’ve seen work best. Whether you‘re a startup founder or a seasoned entrepreneur, my goal is to equip you with the insights and tools you need to accurately assess your company’s worth in today's market. Let’s dive in!
Table of Contents
- How to Value a Business
- What is a Business Valuation?
- Public vs. Private Valuation
- Company Valuation Methods
- Business Valuation Calculators
- Company Valuation Example
What is a Business Valuation?
A business valuation determines a business or company's value. 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 that can be useful in making business decisions and negotiating.
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How to Value a Business
- Company Size
- Profitability
- Revenue
- Market Traction and Growth Rate
- Sustainable Competitive Advantage
- Future Growth Potential
1. Company Size
Company size can sometimes play a huge part in its valuation. For example, smaller companies can appear riskier to investors than large companies and enterprises.
The reason? It's pretty simple. Larger companies have more resources, different product offerings, and a good market share, whereas smaller companies have little market power and are more negatively impacted by the loss of key leaders.
In addition, smaller firms need to show greater returns and come with a greater size premium, which means lower business value.
2. Profitability
Profitability is, unsurprisingly, the most important factor for calculating a company’s valuation. A higher profit means a higher valuation. It demonstrates that customers are willing to buy products or services, and they stand to the market demand.
In my experience, the primary strategy for valuing a business based on profitability is understanding its sales and revenue data.
Note that there is a difference between sales and revenue for larger businesses. For such businesses, sales means the money that the business earns through selling products and services, whereas revenue is the total amount of money that the company makes from all its sources.
3. Revenue
To understand the company’s financial well-being, businesses use the profitability ratio to evaluate the business’s ability to make a profit from revenue.
Though a business might take various approaches to calculating its valuation, time-based revenue is one of the most common.
Time-based revenue estimates the valuation based on future profits. It is calculated by assigning a multiple to the company’s revenue for a specific period in the future.
Here’s how business value is estimated using time-based revenue:
Business Value = Annual Revenue x Adjusted Revenue Multiple
Here is how a company calculates a valuation based on the times revenue method:
- Determine the company’s revenue by using an average of the past 1-3 years.
- Select an appropriate multiple depending on your industry and other factors such as growth potential, profit margins, and risk profile. For instance, a revenue multiple for tech companies is estimated to be 1.5x - 4x.
- You can also adjust the revenue based on certain strengths and weaknesses.
Watch this video to learn more about the times-revenue method:
[Video: https://youtu.be/Fqy23miQ6L0]
4. Market Traction and Growth Rate
Another way to value your company is to determine the industry growth rate and anticipate its future. So, how do you predict market growth?
I use this simple calculation to predict market growth by industry over a period of time. It also depends on market demand, your target market, and consumer expectations.
For example, everyone knows the hype about SaaS and AI in the future. With this market demand, the AI industry is expected to reach $632 billion by 2028.
To calculate the market share, we use the formula as follows:
5. Sustainable Competitive Advantage
What sets your product, service, or solution apart from competitors? Competitive advantage refers to the set of skills and attributes of your company that outperforms the competition. Or, I would say, a competitive advantage is a term that predicts how long your product will last in the future, and others shouldn’t copy it.
If this competitive advantage is too difficult to maintain over time, this could negatively impact your business valuation.
Here’s an example: A company that has developed a unique technology or intellectual property will be protected by the patent or trademark label.
Buyers may even consider this as one of the primary criteria to consider when valuing a company.
6. Future Growth Potential
Is your market or industry expected to grow? Is there an opportunity to expand the business's 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 define current growth potential and future valuation accurately. 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.
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Public vs. Private Valuation
While businesses use the same valuation methods, public and private companies find different ways to value their businesses.
I’ve created this quick graphic comparison between the two types of 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 their balance sheet. The value is based on the asset’s original cost minus any depreciation, amortization, or impairment costs made against it.
Private Company Valuation
Private companies are often harder to value because they have less public information, a limited track record of performance, and financial results that 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 founders’ track record 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. A first-time entrepreneur creates most startups I've reviewed and starts with a valuation between $1.5 and $6 million.
All 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. Due to these factors, the valuation of early-stage companies can be challenging.
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, taxes, 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.
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Company Valuation Methods
Businesses use various methods for determining company valuation. I’ve shared various ways to formulate company values and why it matters.
Market Capitalization Formula
Market Value Capitalization measures a company’s value based on its outstanding shares. However, the valuation fluctuates with the share price.
Here is the formula you would use based on your business's specific numbers:
Here’s a quick example: a company with 10 million shares and $100 per share would have a market cap of $1 billion.
So, if HubSpot has 51.1 million outstanding shares in 2024 and each share costs $503.07, its current market cap is USD 25.83 billion.
Pro tip: In my opinion, market cap isn’t always the best way to value a company since it's only best for the companies that have gone public and sold their shares.
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:
Pro tip: Choose your multiplier carefully. In my experience, most small to medium businesses use 3-6 times annual revenue, but this can vary based on industry, growth rate, and market conditions. Don‘t be afraid to adjust this number to reflect your company’s unique story and potential.
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:
Here’s what the variables mean:
- CF = Cash flow during a given year (you 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.
Pro tip: This method, like 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 recommend some high-quality options.
Business Valuation Calculators
Luckily, there are plenty of tools that can help you as you learn how to calculate the value of your business. Here are some business valuation calculators I recommend:
1. CalcXML
This calculator looks at your business's 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.”
Company Valuation Example
Example 1
It may be helpful to have an example of company valuation, so we’ll go over one using the market capitalization formula displayed below:
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.
Example 2
Say a company's current market price is USD 200 per share, and its cash flow is USD 300 for the next five years. The cost of capital or discount rate is 10%.
For this, I would use the above equation, 300/ (1 + 0.10) ^5 to obtain the value per share as USD 186.27.
Hence, the company has a higher value, and its share can be bought since its market share is higher than the DF value.
Learn the Art of Business Valuation to Sell, Buy, and Invest in Businesses
Business valuation is a crucial component of selling, buying, and investing in a business. In my experience, starting with financial planning is great — but you’ll want to look beyond the financial numbers. Consider your company's unique value proposition, market position, and growth potential for a more accurate picture.
Whether you‘re seeking funding, selling equity, or gauging market value, these factors are vital in evaluating your business. Remember, valuation isn’t just about numbers; it‘s about showcasing your company’s story and potential. Regular valuations can provide insights into your business's health and guide strategic decisions.
Knowing your company‘s true worth empowers you in negotiations and future planning. Take the time to value your business correctly — it’s an investment in your company's future.
Free Financial Planning Templates
Manage your business and personal finances with these five financial planning templates.
- Balance Sheet Template
- Profit & Loss Statement Template
- Financial Projection Template
- And More!
Download Free
All fields are required.
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