The purpose of this calculator is to provide some different valuation scenarios based on an investors rate of return requirements for a particular business. Use this tool to help determine a range of possible values for your business.
Rules of thumb are at best a secondary valuation tool to help assess the reasonableness of other valuation methods. They may not apply to your specific business and caution should be exercised when relying on them. Please contact a Gemma Group representative to discuss your particular situation. Rules of Thumb
Pre tax earnings
(This should be taken from the most recently issued income statement of the business)
In this section you are trying to normalize the most recent income statement to reflect an ongoing income for the business. For example if the Pre tax earnings in Step one includes a large salary for the business owner of $200,000 where a reasonable salary for the work performed is $100,000, then the salary adjustment is $100,000 and this should be added as part of step two. Other adjustments could include things like rent where the business does not pay rent since the property is owned by the business owner. In this example a reasonable rent should be deducted to reflect reality. This section often requires judgement and a careful review of the business income statement and related expenses.
Salaries
One time items
Other (ie. rent)
Normalized Income
(This is the sum of step one and two)
In this section you need to determine what a reasonable investor would require as a rate return on his/her investment after the business is purchased. For example if an investor could earn 6% in a government bond (with little risk) then they would want a higher rate of return for investing in a private business which often has more risk). Investors of private businesses often require rates of return of between 20% to 30% based on a variety of factors, including:
The above factors need to be considered to determine what the relative strengths and weaknesses of the business are and what rate of return the investor would require.
Enter required Rate of Return
Initial Business Value
In this step you need to review the balance sheet of the business. For example if the business has current assets (which is often equal to cash, accounts receivable and inventory) much greater than the current liabilities (which is often equal to bank overdrafts, accounts payable) than there may be additional value to the business which has not been considered. A rule of thumb is that the current assets should be 1.5 to 2 times the current liabilities of the business. The current assets and current liabilities should be clearly shown on the balance sheet as part of the financial statements.
Normalize Balance sheet
If the business has assets that are not part of the business operations (perhaps some vacant land purchased for investment purposes) then the value of these items should be added to the businesses value as well.
Redundant Assets
Estimate of Business Value
