How to Value a Business

Dear Buzz,

I want to buy an existing company. How do I determine what it is worth?


Dear Ollie,

Publicly traded companies make it pretty easy: just see what other people are paying for it! Take their share price and multiply it by the number of shares and you know exactly what (collectively) someone is willing to pay to own the company. Of course it's not a perfect calculation because the market is not always perfect but it's a good start. The best calculation is appropriately called “Enterprise Value” and it works well for any company.

market value — (cash and investments) / (divided by) net earnings

Best regards,