You've been building your business for years. You've brought in customers, recruited staff, survived difficult years, and celebrated successes. Maybe you sometimes think about quitting or selling. Or maybe a buyer or competitor has recently shown interest.
In all cases, sooner or later, the same question comes up: what is your company actually worth?
That is not an easy question, but fortunately not a mystery either. There are proven methods to determine the value of your company. The two most important are the EBITDA multiple method and the Discounted Cash Flow (DCF) method.
In this blog, we'll explain both methods, show you when to use which method, and provide practical examples. So that you, as an entrepreneur, know where you stand.
A bid for your company is only relevant if you know if it's realistic. Many small business owners enter into conversations without insight into the real value. The result: they sell too cheaply or miss a serious opportunity.
A valuation helps you stay in control. It provides you with support for negotiations and makes it clear where there is still value to be gained in your company.
Whether you want to sell, invest, or just set a strategy, knowing the value is a necessary step.
The most used method in SME practice is the EBITDA multiple. EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. Freely translated: profit before interest, taxes, depreciation and amortization.
This method assumes multiplying your EBITDA by a factor, the so-called “multiple”. This multiple varies by company, sector and situation.
The height of the multiple depends on:
Suppose:
When valuing the company, profit is normalized. This means that exceptional, personal or non-market costs or benefits are adjusted so that a buyer gets a fairer picture of the structural result. In this case, your low management fee will be corrected.
Normalization of EBITDA:
Normalized EBITDA = $180,000 − $60,000 = $120,000
You are in a stable B2B service sector, with a solid team, contractual customer loyalty and no strong dependence on yourself as a person. Based on this, a multiple of 4 to 5 realistic.
Company value = normalized EBITDA x multiple
= $120,000 x 4.5 = $540,000
Without adjusting your management fee, you would think that your company is worth $810,000 ($180,000 x 4.5), but a buyer always corrects that. That is why it is important to know which items in your financial statements are normalized when valued:
The DCF method looks at your company's expected future cash flows and calculates them back to today with an interest rate (so-called discount rate). The idea is simple: a euro now is worth more than one euro in five years.
This method is especially suitable if you have a well-founded multi-annual budget and if you expect your company to grow in value.
Let's say you expect the following free cash flows over the next five years:
You're using a 12 percent discount rate. The cash flows are cashed as follows (simplified arithmetic example):
Total present value of cash flows = $848,644
Then you determine the terminal value, for example by applying a growth rate to year 5. Suppose this leads to a cash made terminal value of $1,500,000.
Total value = $848,644 + $1,500,000 = $2,348,644
This method therefore provides a forward-looking picture of the value of your company, based on expected performance.
In addition to the chosen method, there are other factors that influence the value of your company:
Valuation is therefore always a combination of numbers and context. And you need to be able to explain that context to a potential buyer.
A common mistake is that entrepreneurs estimate the value of their company based on turnover or feelings. They think: “I have a million turnover, so it will be worth 1 million.” But value isn't about turnover, it's about profit, continuity and portability.
Another common mistake is waiting until it is too late. If a buyer suddenly calls or you want to quit yourself, you often have too little time to be well prepared.
At BestBonobos, we therefore developed a platform that helps entrepreneurs to arrive at a realistic valuation in a structured, objective and independent way. You get insight into the value of your company and see immediately where you can improve.
If you want to know what your company is worth, start with these steps:
The question “What is my company worth?” is more important than many entrepreneurs think. Not only if you want to sell, but also to make good strategic decisions. The EBITDA multiple and the DCF method are both valuable instruments. They show where you are and where you can go.
A good valuation gives you grip, substantiation and clarity. And with the right tools, you can now do it yourself.
We'll be opening the BestBonobos beta soon. Do you want to be one of the first to test our software for free?
Then sign up below and discover how you can work step by step to optimally value your company.
👉 Sign up for the BestBonobos beta today and discover how our platform helps you with valuation, preparation and sales strategy.
📩 Sign up for a beta? Fill out the form at the bottom of this page
Soon, we expect to start with a limited group of users who can test the platform. You get full functionality and give us feedback. In return, you'll soon be able to use our platform for free for six months! Feel free to sign up now to be kept up to date. You will then receive an invitation in due course:
