Hong Life CalculatorsUnderstanding the business valuation calculator — concept and principle
This calculator estimates what a business is worth with three common approaches: an earnings multiple, capitalized earnings and net asset value. It shows each equity value, the lowest and highest, and their simple average as a headline range. Owners preparing to sell, buyers and advisers use it for a first view before a formal valuation.
How it is calculated
- Market approach: enterprise value EV = EBITDA × EV/EBITDA multiple; equity = EV − net debt
- Income approach: equity = E × (1 + g) ÷ (r − g), where E is normalized yearly earnings to owners, r the required return and g long-term growth; r − g is the capitalization rate
- Asset approach: equity = net assets at fair value
- Headline = average of the three equity values; implied EV ÷ revenue = EV ÷ revenue
The principle
The multiple asks what similar businesses sell for relative to operating earnings. Capitalized earnings is the single-stage stable-growth (Gordon) model: earnings growing at g forever are worth next year's earnings divided by r − g. Net assets, usually a floor for a profitable firm, asks what the parts are worth. Small private firms are riskier and harder to sell than listed ones, so their multiples tend to be lower.
Worked example
Defaults: revenue 2,400,000; EBITDA 360,000; multiple 5; earnings to owners 210,000; required return 20%; growth 3%; net assets 650,000; net debt 250,000.
- EV = 360,000 × 5 = $1,800,000; equity = 1,800,000 − 250,000 = $1,550,000.
- Capitalization rate = 20% − 3% = 17%; equity = 210,000 × 1.03 ÷ 0.17 = $1,272,353.
- Net asset value = $650,000.
- Average = (1,550,000 + 1,272,353 + 650,000) ÷ 3 = $1,157,451.
- Range: $650,000 to $1,550,000; implied EV ÷ revenue = 1,800,000 ÷ 2,400,000 = 0.75.
| Required return for owners (% a year) | Value range — average of three methods |
|---|---|
| 5 | $4,338,333 |
| 10 | $1,763,333 |
| 15 | $1,334,167 |
| 20 | $1,157,451 |
| 25 | $1,061,061 |
| 30 | $1,000,370 |
| 40 | $928,198 |
How to read the result
A wide gap between methods is normal. If net assets are far below the earnings-based values, most value lies in earnings power and goodwill, which must survive the owner's exit. A small change in r − g moves the income value a lot.
Common mistakes
- Using EBITDA that includes one-off gains or no market salary for the owner.
- Comparing a small private firm with listed-company multiples without a discount.
- Setting growth close to the required return, which makes the income value explode.
- Forgetting to subtract net debt from enterprise value.
Frequently asked questions
What is a typical EBITDA multiple for a small business?
It varies by industry, size and risk. Small private firms usually sell for lower multiples than listed companies; check recent deals in your sector.
Why use an average of three methods?
No single method is "true". The average and the range give a balanced starting point for negotiation.
Why must the required return exceed growth?
The Gordon formula divides by r − g; if growth were equal or higher, the value would be infinite or negative.
Sources: A. Damodaran, NYU Stern, data set "Enterprise Value Multiples by Sector (US)", January 2026 · M. J. Gordon, "Dividends, Earnings, and Stock Prices", Review of Economics and Statistics 41 (1959)