What is your company worth? Calculate it online!

Most business owners can tell you what their company’s revenue and profit were, or how many people they employ. But very few can answer the basic question: What is my company worth today? You might think you don’t need to know this because you don’t plan to sell it. But a company’s value isn’t just important when you’re selling it. After all, it represents a significant portion of your assets.

When you own a house, you don’t take care of it just because you want to sell it next year. You maintain it, repair it, and invest in it because you want to preserve its value for yourself and for future generations. It’s the same with a business—only managing its value is considerably more complex. It’s not enough to simply turn a profit every year.

Find out the approximate value of your company

Two companies with the same profit may have completely different total business values (known as “enterprise value”)

One company may be dependent on its founder, a single customer, or a few key employees. It may have weak management, outdated technology, inefficient processes, or a business model that will struggle to remain competitive in a few years. The other earns just as much but has professional leadership, a stable customer base, modern technology, and a credible growth strategy.

Same EBITDA (operating income + depreciation), difference of approximately 225 million CZK

How is the indicative value determined for the owner (the so-called equity value)?

The key factor is how much money a company is able to generate through its business operations over the long term. To simplify things, take its operating profit and add depreciation to it (known as “EBITDA”). Why depreciation? Because it doesn’t represent an actual cash outlay in a given year. If the owner doesn’t have to use it for replacement or further investments, it can remain in the company, or the owner can take it for themselves. Depreciation is an expense, but it isn’t a cash outlay.

On the contrary, at this point you aren’t concerned with how much the company pays in interest or taxes. The way the company is financed and its tax burden are matters of “structure.” And now comes the most important part. Each industry has a specific multiple of annual earnings at which investors are typically willing to buy companies (known as a “multiple”). In one industry, for example, it might be four times as much; in another, six times as much—or even more.

So if a company consistently generates, say, 50 million korunas a year (EBITDA) and companies of its type typically trade at four times that amount, the basic calculation of its value is very simple: 50 million × 4 = 200 million crowns. This is what is known as the total value of the company (or “enterprise value”).

But that’s where the simplicity ends. Next, it’s necessary to determine where those profits actually came from and whether the company will be able to generate them in future years as well. We examine whether there were any extraordinary revenues or expenses in the financial statements, whether any expenses are missing, and whether today’s results reflect the company’s actual and long-term sustainable performance. In other words, expenses and revenues are analyzed in detail, and “normalized EBITDA” is calculated.

The next step is to examine the company itself—specifically, how well is it managed? Is it dependent on its owner? How strong is its management? How stable is its customer base? Is it capable of growth? What technologies and processes does it use? What is its market position? What risks does it face? And how promising is its future?

And it is precisely based on the answers to these questions that an investor adjusts the multiple (that “magic” multiple) he is willing to pay for a particular company.

That is why two companies with the same annual EBITDA can have completely different valuations. One may ultimately have a multiple of four, while the other has a multiple of eight and a half. With annual earnings of 50 million crowns, that’s a difference of 225 million crowns, even though both companies are currently earning exactly the same amount.

Note: So far, we’ve been discussing what’s known as “enterprise value.” Now, how much of that goes to the owner?

Okay, just one more step

With that, we have so far determined the value of the business as a whole.

However, a company may have, for example, 15 million crowns in its accounts, which we add to the owner’s equity. At the same time, it may have 30 million crowns in interest-bearing debt, which will eventually need to be repaid and which we therefore subtract. In that case, we get: 50 * 8.5 = 425 million CZK + 15–30, for a total of 410 million CZK—an approximate value for the owner.

Do you think that a “multiple” isn’t relevant to you—that is, as the business owner? Because you’re not selling your business? Wrong. That multiple indicates that your company will, with a high degree of probability, generate EBITDA—that is, cash—for either one year, two years, or, in our case, 8.5 years. So this is real money, not just a model! But it requires a great deal of managerial effort. Other valuation methods are also used, but that’s beyond the scope of this article.

See? The principle itself isn’t complicated at all.

Something else is much more complicated: managing a company in such a way that its earnings grow over the long term, the quality of the company improves, its risks decrease, and investors are willing to apply ever-higher multiples.

And this is where we return to the beginning of this article.

Managing a company with a focus on long-term value growth is challenging. From an owner’s perspective, however, it can pay off tremendously.