What is My Business Worth Calculator

What is My Business Worth Calculator

function calculateBusinessWorth() { var annualNetProfitInput = document.getElementById("annualNetProfit").value; var ownerCompensationInput = document.getElementById("ownerCompensation").value; var discretionaryExpensesInput = document.getElementById("discretionaryExpenses").value; var valuationMultipleInput = document.getElementById("valuationMultiple").value; var annualNetProfit = parseFloat(annualNetProfitInput); var ownerCompensation = parseFloat(ownerCompensationInput); var discretionaryExpenses = parseFloat(discretionaryExpensesInput); var valuationMultiple = parseFloat(valuationMultipleInput); var resultDiv = document.getElementById("result"); if (isNaN(annualNetProfit) || isNaN(ownerCompensation) || isNaN(discretionaryExpenses) || isNaN(valuationMultiple)) { resultDiv.innerHTML = "Please enter valid numbers for all fields."; return; } if (valuationMultiple <= 0) { resultDiv.innerHTML = "The valuation multiple must be a positive number."; return; } var sde = annualNetProfit + ownerCompensation + discretionaryExpenses; var businessWorth = sde * valuationMultiple; resultDiv.innerHTML = "

Estimated Business Worth:

" + "Seller's Discretionary Earnings (SDE): $" + sde.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + "" + "Estimated Business Value: $" + businessWorth.toLocaleString('en-US', { minimumFractionDigits: 2, maximumFractionDigits: 2 }) + ""; }

Understanding Your Business Worth: The SDE Multiple Method

Determining the value of your business is a critical step, whether you're planning to sell, seeking investment, or simply want to understand your company's financial health. While professional valuations can be complex and involve various methodologies, a common and accessible approach for small to medium-sized businesses is the Seller's Discretionary Earnings (SDE) Multiple Method.

What is Seller's Discretionary Earnings (SDE)?

SDE represents the total financial benefit an owner-operator receives from a business. It's a key metric because it normalizes the earnings to reflect what a single owner could realistically take out of the business, regardless of how they structure their compensation or personal expenses. SDE is calculated by taking the business's net profit and adding back certain expenses that are considered "discretionary" or specific to the current owner. These typically include:

• Annual Net Profit: The profit shown on your income statement before taxes.
• Owner's Salary & Benefits: Any salary, wages, health insurance, or other benefits paid to the owner.
• Other Discretionary Expenses: These are non-essential or non-recurring expenses that a new owner might not incur. Examples include excessive travel, personal vehicle expenses paid by the business, one-time legal fees for a specific issue, or charitable donations not directly tied to business operations.

By adding these back, SDE provides a clearer picture of the cash flow available to a potential new owner, who would then decide how to compensate themselves and manage these expenses.

The Valuation Multiple

Once SDE is determined, it's multiplied by a "valuation multiple" to arrive at an estimated business worth. This multiple is a factor that reflects the industry, risk, growth potential, market demand, and overall attractiveness of the business. Multiples vary significantly:

• Industry: Some industries inherently command higher multiples due to stability, growth, or recurring revenue.
• Size and Stability: Larger, more established businesses with consistent revenue and profit tend to have higher multiples.
• Growth Potential: Businesses with strong growth prospects or proprietary technology may fetch higher multiples.
• Risk Factors: High customer concentration, reliance on a single owner, or significant operational risks can lower the multiple.
• Market Conditions: The overall economic climate and demand for businesses in your sector also play a role.

For many small businesses, multiples typically range from 2 to 4 times SDE, but this is a broad generalization. Specialized brokers or valuation experts can provide more precise multiple ranges for specific industries and business types.

How to Use the Calculator

Our calculator uses the SDE Multiple method to give you a quick estimate:

1. Annual Net Profit: Enter your business's net profit before any owner's compensation or discretionary expenses are added back.
2. Owner's Salary & Benefits: Input the total compensation (salary, bonuses, benefits) you, as the owner, take from the business.
3. Other Discretionary Expenses: Add any other non-essential or personal expenses paid by the business that a new owner might eliminate.
4. Industry Valuation Multiple: Enter an appropriate multiple for your industry. If unsure, a range of 2.5 to 3.5 is often used as a starting point for many stable small businesses, but research specific industry benchmarks.

The calculator will then determine your Seller's Discretionary Earnings (SDE) and multiply it by your chosen multiple to provide an estimated business value.

Example Calculation:

Let's say your business has:

• Annual Net Profit: $100,000
• Owner's Salary & Benefits: $70,000
• Other Discretionary Expenses: $15,000
• Industry Valuation Multiple: 3.0

First, calculate SDE:

SDE = $100,000 (Net Profit) + $70,000 (Owner's Compensation) + $15,000 (Discretionary Expenses) = $185,000

Next, calculate the estimated business worth:

Business Worth = $185,000 (SDE) × 3.0 (Multiple) = $555,000

Important Considerations

This calculator provides an estimate based on a common valuation method. It does not account for all nuances of a business valuation, such as:

• Asset Valuation: The value of tangible assets (equipment, inventory) or intangible assets (brand, patents).
• Debt and Liabilities: The calculator provides an enterprise value, not necessarily the equity value after debt.
• Working Capital Requirements: The amount of cash needed to run the business day-to-day.
• Market Dynamics: Specific buyer demand or unique selling propositions.

For a precise and defensible valuation, especially when selling your business, it is always recommended to consult with a professional business broker, M&A advisor, or certified valuation expert.