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
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.
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
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.
EBITDA Multiplier
Company Value = EBITDA X 4.5
As already explained in the rule of thumb above, the number “3”, i.e. “3 x EBITDA = company value” is often mentioned in connection with this formula. 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 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.
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
This rule of thumb does not consider assets, debts, or profits.
Net Asset 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?
Net asset value
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
Multiply the number of active users by a realistic value per customer.
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
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
Why Rules of Thumb Have Blind Spots
Rules of thumb provide you with a quick, uncomplicated guide to the value of your company. But their simplicity comes at a price: they ignore key value drivers that determine whether a company is actually creating value or just appearing superficially profitable. In particular, two factors are completely missing from almost all multiplier models:
ROIC – how Efficiently your Company Uses Capital
The ROIC (Return on Invested Capital) shows how much profit your company generates per euro invested. It therefore measures capital productivity – a crucial factor that simple formulas do not take into account.
Two companies can have the same EBIT or EBITDA, but only one of them uses its capital efficiently. Anyone who ignores this difference will inevitably arrive at a grossly distorted valuation.
Reinvestment Needs – how much Capital your Growth Devours
Growth is only valuable if it leads to a return that exceeds the cost of capital. Some companies can grow with relatively little additional capital, while others have to invest heavily just to stay on track.
Rules of thumb pretend that growth is »free«. In reality, it never is – and this blind spot can significantly distort the valuation.
ROIC + Growth: the Core of Sustainable Value Creation
Modern corporate finance analyses clearly show that long-term value creation arises from a balanced combination of high return on capital and reasonable, financeable growth.
- High ROIC + growth → significant value creation
- High ROIC + little growth → solid but limited value
- Low ROIC + growth → value destruction
- Low ROIC + stagnating development → hardly any increase in value
Rules of thumb completely overlook this connection. They are therefore only suitable as an initial guide, but never as a viable basis for a realistic valuation.
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.