# How to calculate your business’s value: Here’s what investors are looking for

A man ( let ’ s call him Fred ) once came to me thinking about selling his commercial enterprise. He was doing approximately \$ 1 million a year, and his ebitda was about \$ 100,000, or 10 %, but we ’ ll explain that late. For now, just know that Fred, using the most basic recipe, estimated his business to be worth between \$ 300,000 and \$ 500,000. ad ad

It wasn ’ t. That caller, I told him, was worth \$ 0. My experience in purchasing and selling businesses gives me a unique perspective on their value beyond numbers. Fred overvalued his business because he failed to consider all the factors involved in creating and maintaining measure. If you ’ re selling your business, or ever plan to, learn what investors value and take action now to obtain it so you can make the most of your sale .

### GET TO KNOW YOUR EBITDA

The primary drivers of a business ’ mho value are EBITDA ( earnings before matter to, taxes, disparagement, and amortization ) and multiples of EBITDA. It ’ s like net net income, but not precisely. Broken down simply, a truckload of apples you bought for \$ 100,000 and sold for \$ 120,000 would have an approximate EBITDA of \$ 20,000. Investors looking to buy businesses assign them a value in multiples—x times EBITDA. The most coarse multiple they want is three to five, or profits around 20 %. A company in business for 10 years and holding a 20 % margin presents investors with a safe investment to respect at five times EBITDA, the higher end of average achiever. ad ad Using this basic formula, a company doing \$ 1 million a class, making around \$ 200,000 EBITDA, is deserving between \$ 600,000 and \$ 1 million. Some people make it even more basic, and tone down profits earn a value of one times gross : A occupation doing \$ 1 million is deserving \$ 1 million. The mathematics is deoxyadenosine monophosphate simple as licking your finger and holding it up to predict the upwind, but it offers a road map for entrepreneurs wanting a basic understand of how investors value a commercial enterprise .

### FACTORS THAT INCREASE VALUE

money is backed by confidence, which means the more confidence an investor has in your company, the more money they offer. The areas they pick apart in your business are the like areas where you can add confidence : invest in new equipment and keep high gear retentiveness rates and farseeing employee tenure. Some industries are less attractive to investors, but others are flat-out aphrodisiac, like health and smasher. even in recessions, women will buy more cosmetics, which increases an investor ’ sulfur confidence and leads them to offer a higher multiple.

Sales on an slope besides drive confidence up. A company doing \$ 1 million immediately might have \$ 200 million in contracts lined up for next year. possibly they did \$ 1 million but \$ 500,000 the class before and \$ 250,000 before that. This company is on target to be worth more like \$ 2 million, and five times EBITDA would be a bargain. Investors value a company more when it shows growth through ups and downs. With greater confidence, tied a “ vanilla ” company with small appeal can make its business more attractive to buyers. ad