Simple formula I've always heard is to take 5 times the weighted average adjusted net profit over the last five years. The adjusted net profit would be your actual net business profits + your salary adjusted upward or downward depending on fair market compensation for your labor contribution + any noncash benfits you receive. Such benefits could be a company vehicle, free family framing services, etc.
Example:
Year Net profit Weight Amount
2000 12,000 1 12,000
2001 20,000 2 20,000
2002 23,500 3 70,500
2003 8,250 4 33,000
2004 -5,000 5 -25,000
Total for 5 years 90,000 / 10 X 5 = $ 45,000.
Then adjust for benefits...
Car $ 5000.00 per year.
Family framing $ 1800.00 year
Then adjust for owner contribution to labor...
In this example owner only oversaw operation and workd average of 5 hrs week in business, but took out 50,000 year.
Adjust total for owner salary... say 45,000.
Simple value based on profitability accounting for business trends by weighting the years would be $ 45,000.
Add benefits...6,800
Add owner salary above contribution 45,000
Valuation based on profitability $ 96,800.
This formula does not account for value of inventory, furniture and fixtures and "goodwill".
You could then arrive at another value based on assets and average the two together. Adjustments might need to be made for expected industry future and other intangible factors. Goodwill in this example may be negative as the last few years things were hurtin'.
I apologize if any of my math is off, I didn't use a calculator or triple check anything. If I missed anything that would seem applicable...sorry...working from memory and haven't pulled out the old textbooks.
Dave Makielski