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What Is Market Value and How Do You Calculate It?

What Is Market Value and How Do You Calculate It?
Susan Guillory
Susan GuilloryUpdated February 28, 2022
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Knowing the market value of your business is important for a number of different scenarios. Maybe you’re thinking of selling your business or bringing in investors. Or, perhaps you’re applying for a small business loan. Or, it could be that you just want to better understand where your business stands in your industry as a whole. In order to get those answers, you need to do a business valuation. Read on to learn why it’s important to periodically estimate a small business’s value and how to do it.

What Is Market Value?

The fair market value of a business typically refers to how much that business is worth on the open market. The market value of a business is calculated with a specified formula that takes into account a company’s assets, earnings, industry, and any debt or losses.

What Is Market Value Used for?

The market value of a business can come in handy in several scenarios, including when you’re looking to take on investors or sell your business, or when applying for certain types of business loans. Also, if your company is publicly traded, shareholders will want to know your market value.In addition, you may find it useful to include your market value in your SWOT analysis, as it may be either a strength or weakness, depending on the numbers.Here’s a closer look at some situations where you’ll need to know the market value of a business – either yours or someone else’s.

Investment

New businesses commonly seek funding from venture capitalists or angel investors. This money doesn’t have to be repaid like a loan, but any investors that provide capital to a company will then receive equity in that company. To calculate how much that equity is worth, you have to first know the company’s market value.

Selling a Business

Planning to sell your business? Any potential buyer will want to have an objective estimate of the value of your business to determine if the selling price is a good one. 

Business Loans

If you’re looking to purchase another company and plan to apply for a business loan to do so, you may be required to submit a fair amount of financial information about your own business’s financials, as well as get a business valuation for the company you want to buy.If the amount you’re borrowing minus the appraised value of the business you’re looking to purchase is $250,000 or less, the lender you’re working with can likely do the business valuation. If the amount is more than that, or if there is a close relationship between you and the seller, you will probably need to have an independent business valuation.Recommended: 7 Things to Know About Small Business Cost of Capital 

Being Publicly Traded

How is a stock price determined? In part – and especially when it first has its IPO – by market value. This is an indication of how much a business is worth in the financial market. Stock price is also determined by supply and demand, which is why it frequently rises and falls.

How is Market Value Expressed?

If your company is traded publicly, there are several ways the value of your business is expressed.

EPS

This refers to earnings per share and includes a piece of the company’s profit with every share. The higher the EPS, the higher the company’s profitability.

Book Value per Share

Book value per share is calculated by dividing your company’s equity by total outstanding shares. A higher book value may indicate that your stock is undervalued.

Market Value per Share

Your company’s market value per share can be found by considering the market value of the  company (more on that below) and then dividing that number by the number of outstanding shares.

P/E Ratio

Another indicator of company value is the price-to-earnings ratio, or P/E ratio. To find yours, take the current price of a share of your stock and divide it by EPS (see above). If you have a high P/E, your stock may be overvalued.

Market/Book Ratio

Market/book ratio is used to compare a company’s market value to its book value. You find it by dividing the market value per share (see above) by the book value per share (see above). 

How to Calculate the Market Value of a Business

If you own a small business, there are a few different ways you can determine its market value. Each uses a different aspect of a business to calculate its numerical value — either the company’s income or assets, or using market data on similar companies.If you already know how to calculate your business’s gross profit margin and debt-to-equity ratio, you may be able to do this on your own using pen and paper or with the help of an online business valuation calculator. But don’t be afraid to bring in an accountant or professional appraiser for help.

Assets Approach

With the assets-driven approach, the value of your business is based solely on its assets.To do this type of valuation, first make a list of your company’s assets, including any inventory you have on hand, equipment, real estate you own, and intangible assets, then assign them a monetary value (based on what they would sell for today). Next, add up all your company’s liabilities (including debts, loan payments, and accounts payable). Subtract your liabilities from your assets. The number you’re left with is your market value.

Income Approach

With the income approach, you base your company’s value on the amount of income it can expect to generate in the future. Most online business valuation calculators use a variation of the income approach, but it can help to understand the two most common ways to calculate this. Discounted cash flow method (DCF): This method determines the present value of a business's future cash flow. It is calculated by projecting future cash flow and then discounting it to reach its present value. The discounting rate depends on current interest rates and the degree of risk associated with the business.The DCF approach can be ideal for newer businesses with high-growth potential, but which aren’t yet profitable.Capitalized earnings method: Unlike the DCF method, which accounts for more fluctuations in a business's financial future, the capitalization method assumes that calculations for a single period of time will continue in the future. This approach can be useful if your business produces steady and stable income.

Market Approach

This is perhaps the quickest (and easiest to understand) method of business valuation. The market value approach to pricing a business is similar to the way the price of a house is set – by using “comps.” With market-based business valuation, you look at what companies similar to yours in size, revenue, and other characteristics have sold for. The value of your business is tied to that value. This approach will specifically help you determine an appropriate selling or purchase price based on your local market. Recommended: Guide to Buying Out a Business Partner

Market Value Limitations

The three valuation methods discussed above can help you explore your own business’s worth, as well as give you a general idea of where to start a negotiation between yourself as a seller and a potential buyer. However, each approach has limitations and you can’t assume that any one of these valuation methods will give you a true number. In some cases, you might end up using all of these business valuation methods to get a better sense of your company’s fair market value.Also keep in mind that market value changes over time, thanks to the economy, industry climate, and your own business’s financial wellbeing. You may need to reassess its value if it’s been a while since you calculated market value for your company.

The Takeaway

Understanding the market value of business can help you make smart financial decisions for your company. It can help you attract buyers or investors, price your stock correctly, get a loan to acquire another business, or simply get a better sense of where your business stands in the industry landscape.There are several methods you can use to calculate the market value of a business. If you have access to all the numbers, you may be able to do the valuation yourself. Or, you may want to hire a professional appraiser to do the calculations for you. Feeling confident in your appraisal will help you accurately determine how to pitch investors and raise funding, or price your business to find the right buyer.

Small Business Loan Tips

  1. Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can compare small business loans by filling out one application on Lantern by SoFi.
  2. Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan.
  3. SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.
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Frequently Asked Questions

How do you calculate the fair market value of your business?
What exactly does fair market value mean?
How can you change your business's market value?
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About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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