Valuing a Business for Sale

When you sell a business, a buyer almost immediately asks two questions: “What is the company worth?” and “Which figures support that number?” Without an answer, negotiations turn into bargaining based on impressions.

A working valuation for a sale is a range of possible prices based on stated assumptions. Different approaches provide different reference points; the final figure depends on the quality of the data, risks, and deal terms.

Below we explain how to value a company yourself: which approaches to use, what figures you need, and what most often undermines a calculation during negotiations.

Where a business valuation begins

Imagine a negotiation: a buyer asks for the “company's value.” You name a figure and hear, “Is that market value, or did you calculate it for a particular investor?” It is an awkward but fair question: the result depends on your assumptions, including whether this is an ordinary sale, a forced sale, or a purchase that creates synergies with another business.

For a sale, you usually need a market reference point: what a typical buyer would pay under typical conditions. A real deal often has a range and a payment structure: part of the price is fixed, while another part depends on results, such as installments, an earn-out, or a payment for retaining key staff.

Start by deciding what the buyer will regard as the measure of success: reported profit, cash flow, payback, or asset value. If you want to distinguish “price” from “value,” see the separate 101 article on the difference between price and value (in Russian).

What are you selling: a stake or the whole business?

Imagine a buyer saying, “I am buying the business together with its company and debts,” while you are thinking, “I am selling my stake and taking the money out of the account.” Calculations diverge at this point even when both parties are acting in good faith.

Deals usually involve two measures of value. The first is enterprise value (EV), which can be estimated using multiples or a DCF based on cash flows available to the whole company. The second is equity value, the value of the owner's stake. You can estimate equity value directly from cash flows available to owners or derive it from EV. For a private company, the bridge is EV = equity value + interest-bearing debt − cash; conversely, equity value = EV − interest-bearing debt + cash. Adjust the calculation for what counts as debt, non-operating assets, and the deal terms. Market capitalization applies to a public company. The actual transaction price also depends on payment terms, warranties, and risks. Before applying a multiple, list debt, cash, loans to and from the owner, guarantees, and disputed obligations separately.

Three approaches to business valuation

Suppose you open a valuer's report and see three sections with different numbers. That is normal: valuation uses the income, market, and asset approaches.

For many small and medium businesses, a useful combination is the market approach as a reference to observed prices and the income approach as a test of the buyer's potential return. The asset approach provides another reference point, particularly when tangible assets matter.

Income approach: DCF based on cash flows

Imagine a buyer saying, “I need to recover my investment in three or four years.” That is a discussion about the income approach: the price depends on the future benefits expected from the business.

One useful tool is discounted cash flow (DCF): forecast cash flows, then use a discount rate to express their value today. The 101 article on discounting cash flows (in Russian) explains the basic present value and DCF formulas behind this calculation.

If you want to calculate DCF without “financial magic,” follow a straightforward sequence.

Step 1. Take actual cash flows for the past 12–24 months and break them down into receipts, recurring expenses, one-off expenses, investments such as equipment or software, and changes in working capital.

Step 2. Build conservative, base, and optimistic forecasts for the next three to five years. Base the forecast on drivers such as volume, average order value, and margin rather than simply imposing growth percentages.

Step 3. Match the cash flow to the discount rate. Discount free cash flow to the firm (FCFF) using the weighted average cost of capital (WACC) to estimate EV. Discount free cash flow to equity (FCFE) using the cost of equity to estimate the owner's stake. The rate reflects time and risk.

Step 4. Discount the forecast cash flows to present value (PV). Estimate the terminal value after the forecast horizon separately and discount it as well. Their sum estimates EV when you use FCFF, or equity value when you use FCFE. The result is sensitive to growth and discount-rate assumptions.

Step 5. If you valued FCFF, convert EV into equity value after accounting for debt and cash. If you valued FCFE, you have already estimated equity value. In either case, discuss payment terms separately, including installments and payments after management changes hands.

Basic management reports will help you prepare the figures: a profit and loss statement (P&L), cash flow statement, and balance sheet. In the 101 App, these reports are generated from transactions entered for projects and the company fund.

Market approach: multiples and comparable businesses

You see a “similar business” offered for a particular price and want to use it as a benchmark. That is the market approach: estimating value from prices of comparable businesses.

Multiples frequently come up in business sales. A common one is EV/EBITDA: it compares enterprise value with earnings before interest, taxes, depreciation, and amortization and helps compare companies with different levels of debt.

A multiple works only when the businesses being compared are sufficiently similar. Check at least four characteristics:

• segment and business model, such as contracting, manufacturing, trading, services, or subscriptions;
• scale, with revenue and profit in roughly the same range;
• margins and stability of demand;
• risks, such as dependence on the owner, reliance on one customer, or staff shortages.

Agree which measure you are multiplying: net profit, EBITDA, or cash flow. Record both the measure and the multiple. Then account for debt and cash separately: EV includes the value financed by debt and must be reconciled with cash when deriving equity value.

Asset approach: net assets

Imagine a business that has just suffered a downturn. It has little profit, but it still owns equipment, inventory, advances paid, and other assets. The income approach may provide a weak basis, so you start by estimating what the assets are worth.

The asset approach reflects a principle of substitution: a buyer will consider the cost of obtaining an asset of equivalent utility, whether by buying or creating it.

For a company, a simple starting point is assets less liabilities, adjusted for the assets' market value and the quality of the liabilities. Net assets are a separate reference point, not a universal price floor: illiquid assets, obligations, selling costs, and losses may lead to a transaction price below that estimate.

It also rarely answers the buyer's main question: how much cash can be earned by operating those assets? Compare it with the market or income approach where reliable data for those approaches exists.

Adjustments a valuation cannot do without

A buyer examines the bank statement and asks why the company paid the owner's personal expenses. The profit presented for negotiation is now open to challenge because the underlying figures have not been normalized.

Before valuing a business using a multiple or DCF, adjust its financial picture to show how the business operates without dependence on the owner and without one-off events. Typical adjustments include:

• removing one-off income and expenses;
• adjusting the owner's and key employees' pay to market levels;
• removing personal payments and non-business costs;
• checking receivables and payables so that you do not sell “paper profit.”

Working capital deserves separate attention. If the buyer will need to inject more working capital after the deal, they may reduce the price today. See the 101 article on working capital (in Russian).

The buyer will also ask which reports support your calculations. With management accounting set up in advance, including P&L, cash flow, and the balance sheet, that conversation is shorter. The 101 blog has introductions to tracking income and expenses (in Russian) and keeping track of construction expenses (in Russian).

Once the data is sound, calculate the measures you need for negotiations: profitability, margin, and earnings stability. The formula and an explanation of which figures to divide are in the 101 article on calculating business profitability (in Russian).

If you already track your figures in 101 and want regular analytics and metrics, PRO+ may help.

A quick calculation process for an owner

Imagine planning to sell in three to six months. You want to decide what asking price to publish and what price you can defend in negotiations. Calculate in two layers: a quick estimate and a documented one.

Step 1. Gather revenue, gross margin, net profit, cash flow, debt, cash balances, receivables, and payables.

Step 2. Normalize profit: remove one-off items and personal payments, and assign the owner a market salary.

Step 3. Estimate a market-based value: profit or EBITDA multiplied by a multiple derived from comparables. Record the measure and multiple in writing.

Step 4. Estimate an income-based value using DCF with three scenarios, a terminal value, and a discount rate appropriate to the cash flow being valued.

Step 5. Calculate an asset-based reference point: assets at a supportable market value less liabilities, with separate consideration of liquidity and selling costs.

Step 6. Translate the estimates into deal terms: how debt is treated, whether the company keeps its cash, and whether payment is made in installments.

Step 7. Prepare a buyer's file containing reports, contracts, lists of assets and liabilities, and details of major customers.