Calculate Company Value Using Common Rules of Thumb (with Examples)

Imagine you want to quickly know what your company is roughly worth – without immediately hiring an expensive consultant. In such cases, simple rules of thumb offer an initial orientation: From revenue and profit multipliers to asset value. But caution: Each formula has its limitations and is not equally suitable for all types of companies. In this article, you’ll learn how to correctly apply the most important rules of thumb, what pitfalls exist, and how practical examples can help you roughly estimate the value of your company. Keep reading to find out which method best suits your industry and business model.

Payback Period Formula

Purchase Price Amortizes in 4-7 Years

Consideration: How much profit could a buyer extract from the company in the coming years? After how many years would the buyer’s investment be amortized? An amortization after 4-7 years seems fair to us.

Set the price so that the purchase price is amortized within 4 to 7 years.

Who is this Method Suitable for?

Amortization Formula

  • Suitable for companies with stable profits
  • Suitable for companies in a stable market
  • Suitable for companies with rather low capital intensity
  • Not suitable for rapidly growing or shrinking companies
  • Not suitable for non-profitable companies

The profits should not fluctuate too much to avoid distorting the result. If necessary, one could calculate an average profit for the last three or five years and/or weight the profits of recent years, with the current year carrying the most weight.

Example Payback Period Formula

Example assumptions:

Revenue: 150
– Expenses:110
= Net profit:40
x 4 (years payback period):= 160
and
Revenue: 150
– Expenses:110
= Net profit:40
x 7 (years payback period:)= 280

The company value is between 160 and 280

EBIT Multiplier

Company Value = EBIT X 5

There are numerous sites on the internet where the number 3 is given as a multiplier, i.e., the formula “3 x EBIT = Company value”. However, this completely disregards the industry and company size. You can find appropriate current multipliers on our website.

The profit indicator “EBIT” includes all operating costs, including depreciation, thus providing a comprehensive view of operational efficiency. EBIT shows you the actual operational profitability of your company, without being influenced by financing and tax structure.

Who is this Method Suitable for?

EBIT Multiplier Formula

  • Suitable for companies with stable profits
  • Suitable for companies in a stable market
  • Suitable for companies with rather low capital intensity
  • Not suitable for rapidly growing or shrinking companies
  • Not suitable for non-profitable companies

Do you have stable profits? For the result to have any significance, your company should achieve stable and predictable profits. Stable profits require solid and reliable income streams, stable costs, and profit margins.

Is the company operating in an established market? There has been a market for your products or services for some time. The competitive situation, volatility, and general risks, etc. are manageable.

Is the capital intensity in your industry rather low? Low capital intensity means that your company needs to invest less in physical assets such as machines, buildings, or infrastructure. As a result, depreciation on these assets is lower.

Example EBIT Multiplier Formula

Example assumptions:

Revenue: 100
– Operating costs: 40
= EBITDA: 60
– Depreciation: 10
EBIT 30
x Multiplier: 5

Calculation of Company Value:

EBIT x Multiple = 30 x 5 = 150

EBITDA Multiplier

Company Value = EBITDA X 4.5

As explained in the above rule of thumb, the number “3”, i.e., “3 x EBITDA = Company Value” is often mentioned in connection with this formula. We believe that this multiplier is not correct in most cases. Here too, we refer to the current and industry-specific multiples on our website.

Who is this Method Suitable for?

EBITDA Multiplier Formula

  • Suitable for companies with stable profits
  • Suitable for companies in a stable market
  • Suitable for companies with rather high capital intensity
  • Not suitable for rapidly growing or shrinking companies
  • Not suitable for non-profitable companies

The profit indicator EBITDA offers neutrality towards depreciation and financing costs, which is particularly advantageous in capital-intensive industries, industries with high growth investments, or with fluctuating financing costs, as it allows a clearer view of operational efficiency.

But here too, the application of the formula only makes sense if it is an established, stable company with stable profits.

Example EBITDA Multiplier Formula

Example assumptions:

Revenue: 100
– Operating costs:60
= EBITDA:40
Multiple:= 4.5

Earnings before interest, taxes, depreciation, and amortization (EBITDA) is 40.

Company Value Calculation:

EBIT x Multiple = 40 x 4.5 = 180

Revenue Multiplier

Company Value = Revenue X 1.0

Take an average revenue and multiply it by a multiplier to get your company value. Common multipliers vary greatly from industry to industry. It is important to choose the multiplier based on comparable companies in the same industry. As with the two formulas above, we also recommend selecting the appropriate multiplier on our website.

Revenue Multiplier Formula

  • Suitable for companies where revenue growth is a primary driver of value
  • Suitable for companies in rapidly growing markets. Suitable for companies with rather low capital intensity
  • Not suitable for established companies in stable industries
  • Not suitable for capital-intensive industries

This rule of thumb does not consider assets, debts, or profits.

Example Calculation Revenue Multiplier

Revenue: €500,000

Industry-typical multiple for an industrial company: 1

Company value (500,000 x ): €500,000

Calculation of Company Value:

Revenue x Multiple = €500,000 x 1 = €500,000

Substance Value = Company Value

Substance Value = Company Value

Calculate the value of your company by evaluating the existing assets as accurately as possible and subtracting the liabilities from it.

Who is this Method Suitable for?

Substance value

  • Suitable for insolvent companies
  • Suitable for companies that are to be liquidated
  • Suitable for companies with assets, such as machinery
  • Not suitable for companies that have no saleable assets
  • Not suitable for companies that have stable profits

This formula is particularly suitable if your company is insolvent or you plan to liquidate it. If the company is to be dissolved and the assets sold, the market value of the assets is crucial. The substance value provides a realistic value that creditors or shareholders can expect.

Customer Value

Value per Customer X Number of Customers

With a strong user base, the company valuation can be based on the number of users or customers.

Who is this Method Suitable for?

Value per Customer

  • Suitable for companies that are not yet profitable but already have a larger number of recurring customers.
  • Suitable for companies that offer services where customers pay regularly and high customer loyalty is desired.
  • Not suitable for companies where customers are most likely to make only one purchase
  • Not suitable for companies with very short customer life cycles

Multiply the number of active users by a realistic value per customer.

Example Calculation Value per Customer

(A) Average order value: 50
(B) Average orders per year: 4
(C) Average customer lifetime: 5 years
(D) Contribution margin (revenue – variable costs): 30%
(E) Acquisition costs per customer 20
Number of customers 5000

Customer lifetime value: (A x B x C) x D – E

Step 1: Revenue per customer over the entire lifetime: (50 x 4 x 5) = €1000

Step 2: Contribution margin: €1000 x 0.3 = €300

Step 3: Deduction of acquisition costs: €300 – €20 = €280 = (Customer value)

Company value calculation:

Customer value x Number of customers = €280 x 5000 = €1,400,000

Costs to Reproduce a Company

Tangible + Intangible Assets + Infrastructure + Operating Resources

Calculate how much it would cost the buyer to develop the same product or service from scratch. This includes not only assets but also research and development, marketing costs, technology, and infrastructure.

Who is this Method Suitable for?

Reproduction Costs

  • Suitable for companies that are still relatively new and not too complex
  • Suitable for companies whose value is heavily based on their physical assets
  • Suitable for companies whose assets are quantifiable
  • Not suitable for large and very complex companies
  • Not suitable for companies whose value is mainly determined by intangible assets, intellectual property, future growth potential, or strong brands

Example Calculation of Reproduction Value

Example: a small manufacturing company

Tangible assets (machines, etc.):
€1,280,000
Intangible assets (software, licenses, etc.):
€550,000
Infrastructure and general operating resources:
€80,000

Company value calculation:

Tangible + intangible assets + infrastructure and operating resources: €1,280,000 + €550,000 + €80,000 = €1,910,000

Financing Rounds Multiplier

Value after the Last Financing round X Markup in %

Use the value achieved in the last investment round as a reference point for the valuation and adjust the valuation according to the progress made since then and the milestones achieved.

Who is this Method Suitable for?

Financing Rounds Multiplier

  • Suitable for startups that are in a growth phase and have already had a financing round
  • Suitable for companies that were bought or sold not too long ago
  • Established companies with stable earnings are better valued using a different method
  • Not suitable for companies in crisis situations

Example Calculation of Financing Rounds Multiplier

Based on the last financing round

Pre-money value before last financing round:
€8,000,000
Invested amount (for 20% of the company):
€2,000,000
Post-money value after last financing round:
€10,000,000
10% markup for more revenue, growth, etc.:
€1,000,000
New (pre-money) value:
€11,000,000

Company value calculation:

Value after the last financing round: (€2,000,000 / 20%) * 100% = €10,000,000

New valuation with 10% markup for growth, etc.: €10,000,000 * 10% = €11,000,000

Purpose of Rules of Thumb for Company Valuation

Rules of thumb for company valuation are a useful tool for quick, cost-effective, and comparable estimates of company value. Their simplicity makes them particularly attractive in early stages of evaluation, although their accuracy and applicability vary depending on the industry and specific company conditions.