Check out the different rules of thumb for quickly evaluating a company. Of course, the result is inaccurate and ignores important areas and aspects in individual cases, but it can give you a very first indication. Caution! Not every rule of thumb is suitable for every industry and every type of company!
Amortization period formula
Purchase price amortizes in 4-7 years
Consideration: How much profit could a buyer take out of the company in the next few years? After how many years will the buyer’s investment have paid for itself? A payback period of 4-7 years seems fair to us.
Set the price so that the purchase price is paid back within 4 to 7 years.
Who is this method suitable for?
Amortization formula
Profits should not fluctuate too much so that the result is not distorted. If necessary, one could calculate an average of the profits of the last three or five years and/or weight the profits of the last few years, with the current year having the greatest weight.
Example amortization period formula
Example assumptions:
| Yield: | 150 | – Expenses: | 110 | = Net profit: | 40 | x 4 (years amortization period): | = 160 | and | Yield: | 150 | – Expenses: | 110 | = Net profit: | 40 | x 7 (years amortization period:) | = 280 | |
The business value is between 160 and 280.
EBIT multiplier
Enterprise value = EBIT x 5
There are numerous sites on the Internet that use the number 3 as a multiplier, i.e. the formula "3 x EBIT = goodwill". However, the industry and company size are completely ignored here. Matching current You can find multipliers on our website.
The profit indicator “EBIT” includes all operating costs, including depreciation, and thus offers a comprehensive view of operational efficiency. EBIT shows you the actual operating profitability of your company without being influenced by financing and tax structure.
Who is this method suitable for?
EBIT multiplier formula
Do you have stable profits? If the result is to have any meaning at all, your company should achieve stable and predictable profits. Stable profits require solid and reliable income streams, stable costs and profit margins.
Does the company operate in an established market? There has been a market for your products or services for a long time. The competitive situation, the volatility and the general risks, etc. are manageable.
Is the capital intensity in your industry rather low? Low capital intensity means that companies need to invest less in physical assets such as machinery, buildings or infrastructure. As a result, the depreciation on these assets is lower.
Example EBIT Multiplier Formula
Example assumptions:
| Sales volume: | 100 |
| – operating costs: | 40 |
| = EBITDA: | 60 |
| – Depreciation: | 10 |
| EBIT | 30 |
| x Multiplier: | 5 |
Calculation of business value:
EBIT x Multiple = 30 x 5 = 150
EBITDA multiplier
Enterprise value = EBITDA x 4.5
As already explained in the rule of thumb above, the number "3" is often mentioned in connection with this formula, i.e. "3 x EBITDA = goodwill". We believe that this multiplier is incorrect in the vast majority of cases. Here too we refer to the current and industry-specific multiples on our website.
Who is this method suitable for?
EBITDA multiplier formula
The EBITDA profit metric 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 because 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:
| Sales volume: | 100 | – operating costs: | 60 | = EBITDA: | 40 | Multiple: | = 4.5 |
Earnings before interest, taxes, depreciation and amortization (EBITDA) amount to 40.
Calculation of business value:
EBIT x Multiple = 40 x 4.5 = 180
Sales multiplier
Company value = sales x 1.0
Take an average turnover and multiply it by a multiplier to get your business 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 recommend that you use the select the appropriate multiplier .
Sales Multiplier Formula
This rule of thumb does not take into account assets, debts or profits.
Example Calculation Sales Multiplier
Sales: €500,000
Industry-typical multiple for an industrial company: 1
Business value (500,000 x): €500,000
Calculation of business value:
Sales x Multiple = €500,000 x 1 = €500,000
Net asset value = goodwill
Net asset value = goodwill
Calculate the value of your business by evaluating the assets you have as accurately as possible and subtracting your liabilities.
Who is this method suitable for?
Intrinsic value
This formula is particularly suitable if your company is insolvent or you are planning to liquidate it. If the company is to be dissolved and the assets sold, the market value of the assets is crucial. The intrinsic value indicates a realistic value that creditors or shareholders can expect.
Value of customers
Value per customer x number of customers
If the user base is strong, the company’s valuation can be based on the number of users or customers.
Who is this method suitable for?
Value per customer
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 (sales – 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: Lifetime revenue per customer: (50 x 4 x 5) = 1000 €
Step 2: Contribution margin: 1000 € x 0.3 = 300 €
Step 3: Deduct acquisition costs: €300 – €20 = €280 = (value of the customer)
Calculation of business value:
Value of the customer 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. In addition to assets, this also includes research and development, marketing costs, technology and infrastructure.
Who is this method suitable for?
Costs for reproduction
Example Calculation Reproduction Value
Example: a small manufacturing company
| Tangible assets (machines, etc.): | 1.280.000 € | ||
| Intangible assets (software, licenses, etc.): | 550.000 € | ||
| Infrastructure and general resources: | 80.000 € |
Calculation of business value:
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 premium 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
Example calculation 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% surcharge for more sales, growth, etc.: | 1.000.000 € | ||
| new (pre money) value: | 11.000.000 € |
Calculation of business value:
Value after the last financing round: (2,000,000 €/ 20%) * 100% = 10,000,000 €
New valuation with 10% surcharge for growth, etc.: €10,000,000 * 10%= €11,000,000
Meaning of rules of thumb for evaluating companies
Rules of thumb for valuing companies are a useful tool for quick, cost-effective and comparable estimates of company value. Their simplicity makes them particularly attractive in early stages of valuation, although their accuracy and applicability varies depending on the industry and specific company conditions.