calculating worth of a business

[howard]

how do you calculate the worth of a business? i'm just curious.

do you multiply the gross income of a year by an amount of years?

ie: 100,000(income)x5(years)=500,000

so the company in the example would sell for 500,000? is something like this correct? what other factors are there?

[howard]

anyone??

[macktheknife]

This is a question that many in academics have thought about in the past 50 years. The short and incomplete answer is that there are various metrics to evaluate the "worth" of a business such as EVA, PV analysis, etc. Past income is a good indicator of a company's worth, but future prospects are more important--which means whatever method you employ is bound to involve alot of guess work.

Look at it this way: Microsoft's revenue is less than four times that of GE's, yet MSFT's profit margins are much higher and less vulnerable (given the company's monopolistic position). On paper, GE's assets and revenues are considerably greater, but if you know that MSFT will earn a 20% profit margin vs. GE's 10% (all made up numbers, BTW), is it fair to say that GE is "worth" more than MSFT? Thus, your gross income calculations won't work.

[Stelliform]

It really depends on the type of company. For example, I am a computer guy. My Business worth is my assets + the net income. (I.E. after I pay me and expenses.) So lets say I have 5k in assets, and I grossed 100k last year. My expenses were 20K and I paid myself 60K. Therefore my business worth is 5+(100-20-60) So by this formula my business worth is 25k. (According to my CPA, this is how you figure it)

But each company structure is different. So M$ and Apple use a different formula.