While there are potentially many ways to value a business, one traditional method is using the discounted, or present value, of your estimated cash flow. This method takes your current income, before income, taxes, depreciation and amortization and projected income for a defined number of years and determines the present value of that income, based on the cost of capital. Some businesses are less valuable because of their marketability, and as a result, a discount is often applied to reflect the difficulties that may be encountered when trying to sell the business. Keep in mind that this method does not include the value of your companies assets, only its ability to produce income.
The Value of Your Business
Cumulative Earnings |
Cost of Capital |
Present Value of Earnings |
Discounted Value |
|---|---|---|---|
| $ 438,254 | 12.50 % | $ 339,769 | $ 254,826 |
Based on the discounted cash flows of your earnings and excess compensation, your business has a present value of $339,769 and a discounted value of $254,826 once the marketability of your business is taken into consideration.
| Year | Annual Earnings and Excessive Compensation | Present Value of Earnings |
|---|---|---|
| 0 | 0 | 0.00 |
| 1 | $ 65,000.00 | $ 65,000.00 |
| 2 | $ 74,750.00 | $ 66,444.44 |
| 3 | $ 85,962.50 | $ 67,920.99 |
| 4 | $ 98,856.88 | $ 69,430.34 |
| 5 | $ 113,685.41 | $ 70,973.24 |