Valuation calculators examples: six hypothetical runs

These valuation calculators examples walk through six invented runs of a calculator like ones found elsewhere. Each run shows what the tool did with its inputs and why the output was not a price.

No real business appears, and the page itself has no form. Each run is worked in round illustrative figures in U.S. dollars, and every ratio below is an assumption chosen to make the arithmetic visible, not a market benchmark. These are hypothetical multiplication models, not tests of live calculators or reported sales; the figures come solely from the stated assumptions and arithmetic, not dated transaction data. The tools they model are real, though: the estimate form a marketplace publishes, the subscription calculator a data vendor sells, the in-house tool a brokerage keeps, the pre-qualification form a bank hands a borrower. The arithmetic is simple on purpose: it is the least interesting part.

What to take away

Run one: two businesses, one output

Two owners in the same trade enter the same revenue and the same earnings into the same tool. It returns the same figure to both. One business has a hundred customers and a manager who runs it; the other has three customers and an owner who holds every relationship.

What the tool did. Multiplied an identical input by an identical ratio. It had no field for concentration or owner dependence, so it could not tell the businesses apart. Both entered revenue of 1,000,000 and earnings of 200,000; the tool applied a ratio of 2.5 to earnings and returned 500,000 to each.

Why the output is not a price. A buyer would pay very different amounts for these two, and the difference is entirely in what the form never asked. The calculators guide sets out the full list of things a form cannot capture; these two runs are that list made concrete.

Run two: one business, two tools

An owner enters the same figures into two different calculators and receives two different outputs, one comfortably above the other: earnings of 200,000 come back as 440,000 from one tool and 620,000 from the other.

What the tools did. Each applied its own stored ratio. In a real tool, that difference might reflect different collections of past transactions, asking prices, periods or business sizes; here both ratios are assumed. Neither tool showed its ratio. Working backwards, one applied 2.2 and the other 3.1, and the 180,000 between the outputs is nothing but the gap between those two hidden numbers.

Why the output is not a price. The gap between the two outputs is the gap between two hidden numbers, and the owner has no way to judge which is nearer the truth. Any tool that will not show the ratio it applied is producing a figure that cannot be audited, which is the plainest case of garbage in, garbage out there is: the garbage is in the tool, not in the inputs.

Run three: the dropdown moves the number more than the business does

An owner tries two industry selections that both plausibly describe the business. The output changes substantially. They then double the earnings input under one selection, and the output changes by roughly the same amount. For examples worked by valuation approach, see our valuation methods examples.

What the tool did. The industry selection chose the ratio. The earnings input scaled it. A change of ratio and a change of input had comparable effects, because the tool is nothing but the product of the two. With earnings of 200,000, one industry choice applied 2.0 and returned 400,000; the other applied 4.0 and returned 800,000. Doubling earnings to 400,000 under the first choice also returned 800,000.

Why the output is not a price. A buyer does not consult a category. They consult the record. When a menu choice moves the figure as much as doubling the profit would, the figure is describing the menu.

Run four: revenue-only, thin margin

A business with high turnover and very little left after costs is entered into a tool that asks only for revenue. The output is large: revenue of 3,000,000 at a revenue ratio of 0.4 returns 1,200,000, for a business that keeps 60,000 a year after costs. That output is twenty years of what the buyer would actually receive.

What the tool did. Applied a ratio to turnover, as it does for every business regardless of what survives the costs.

Why the output is not a price. The buyer is purchasing what remains after every cost, and here almost nothing does. Revenue measures activity. The tool valued the activity. The valuation methods guide explains why revenue cannot serve as a base for any serious method.

Run five: the wrong earnings in the right box

An owner enters their total benefit from working in the business, wages, benefits and discretionary items included, into a tool whose ratio was built for the operating result after a market-rate manager is paid.

What the tool did. Multiplied a larger number by a ratio meant for a smaller one. The owner's total benefit, often called seller's discretionary earnings, came to 250,000. The operating result after paying a market-rate manager was 160,000. A ratio of 3.0 built for the second figure gives 480,000; applied to the first, it gives 750,000.

Why the output is not a price. The two earnings definitions differ by roughly the value of the owner's own labor, here 90,000, and a ratio calibrated on one applied to the other overstates the result by a margin no buyer will accept: 270,000 in this run. The IRS's Internal Revenue Manual 4.48.4, Business Valuation Guidelines, makes the same point for professional appraisers: they select the benefit stream, such as pre-tax or after-tax income or cash flows, and then select discount rates, capitalization rates or multiples consistent with the benefit stream selected. Tools rarely say which definition they expect, and owners rarely know which they entered.

Run six: the run that was useful

An owner enters the figures once, then changes one input at a time, holding the rest constant: earnings up and down, then revenue, then whatever else the form allows. They write down how far the output moved each time. From a base of 200,000 earnings and 1,000,000 revenue, adding 20,000 to earnings moved the output by 50,000; adding 100,000 to revenue moved it by nothing at all.

What the tool did. Exactly what it did in the other runs. The difference is that the owner used it as a sensitivity analysis rather than as an oracle.

Why this was worth doing. The owner learned which inputs the output is sensitive to, which is a fact about the tool that happens to correspond to a fact about buyers: they price earnings, not revenue. They also learned that the output is more sensitive to the hidden ratio than to anything they can type, and that is the correct lesson to leave with. What they did next was hand the figures to an accountant and begin the preparation year, because the interesting questions all start where the form stops.

The pattern across the six

In five runs the output was wrong, and in each the reason was one of three things: an input the tool never asked for, a ratio it never showed, or an input entered on the wrong basis. Across the runs the same 200,000 of earnings produced anything from 400,000 to 800,000 depending on a ratio the owner never saw. The same IRS guidelines name three generally accepted approaches, asset-based, market and income, and say consideration should be given to all three; a calculator applies one ratio from one of them.

The sixth run was right only because the owner stopped reading the output as a number and started reading it as a shape. Whatever a calculator returns, a buyer's diligence will replace it with a figure built from the record, and the owner who understood the six runs will not be surprised by the difference.

Where a real calculator's ratio comes from

The six runs invent one thing on purpose: the ratio. It is the part a live tool keeps from you, and in a real tool it comes from one of a few places, each with a name, a period and a scope.

A tool that will not name its source and its date is not handing you a market multiple. It is handing you a guess with a decimal point.

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