At some point in the life of a business, whether you're raising funding, preparing for a sale, or just trying to understand what your hard work is worth, you’ll encounter the question: what’s my business actually worth? Business valuation may sound complex, but at its core, there are a few common techniques that entrepreneurs and SME owners should be familiar with.
Let’s break them down in plain language.
1. Earnings Multiples (Price-to-Earnings or EBITDA Multiples)
One of the most widely used approaches for established, profitable businesses is the earnings multiple method. Here, your business’s value is based on how much profit it generates, typically using net profit or EBITDA (earnings before interest, tax, depreciation, and amortisation).
For example, if your business generates R1 million in EBITDA annually and the going multiple for your industry is 5x, then your business might be valued at R5 million.
The multiple varies depending on several factors: such as the industry, risk profile, growth potential, and whether the business relies heavily on the owner. More stable, growing businesses with recurring income often command higher multiples.
2. Discounted Cash Flow (DCF)
The DCF method is a more technical approach that estimates the present value of future cash flows. In other words, it looks at how much money your business is expected to make in the years ahead, and then "discounts" those future earnings back to today’s value using a discount rate (which reflects the risk of the business and the time value of money).
This method is ideal for businesses with clear projections and relatively stable cash flows. It’s especially useful when growth is expected to be strong, even if current profits are still low.
3. Asset-Based Valuation
This approach looks at the net value of a business’s assets (i.e. total assets minus total liabilities). It’s more relevant for asset-heavy businesses, like property, manufacturing, or logistics companies, where the physical or financial assets are a major source of value.
This method might undervalue businesses that are service-based or reliant on intangible assets (like brand or customer relationships), but it's sometimes used as a floor valuation.
4. Revenue Multiples
When a business isn’t yet profitable or has inconsistent earnings, a revenue multiple may be applied instead. For instance, early-stage or high-growth tech startups often get valued at a multiple of their revenue, especially if they’re showing strong growth, even without profitability.
Just like earnings multiples, revenue multiples vary by sector and growth expectations.
5. Rule-of-Thumb or Industry Benchmarks
Some industries have rough rules of thumb for valuing a business. For example, restaurants may sell for a percentage of annual turnover, or accounting firms might be priced at a multiple of annual billings. These methods are quick and commonly used in informal sales, but they lack precision and don't account for risk or unique circumstances.
Which Method Should You Use?
There’s no one-size-fits-all answer. Often, a combination of these methods is used to triangulate a reasonable valuation range. The method chosen depends on your business’s stage, profitability, asset base, and future prospects.
The key takeaway? Understanding these valuation techniques helps you have more informed conversations with investors, buyers, or advisors - and gives you a clearer picture of what drives long-term value in your business.