As I am writing this article, I found a plethora of online tools that use a calculator to evaluate a company in Midland. These tools indicate that they can evaluate your business with “no need to spend time or money on a business valuation firm.” These online calculators are fairly simple to use, and all they require minimal input from the Midland business owner to evaluate their company. I searched online utilizing the Google browser and “valuation online calculator” as the subject. I found ten websites on the first page. The first two were ExitAdiviser and CalcXML. Using ExitAdviser’s calculator to evaluate your company, just enter:

• Net profit for the last reported financial year (let’s say $100,000)
• Your annual growth rate for the forecast period of 2020-2023 (let’s say 3.0%)

Voila! Your Midland company is worth $560,000 using this free online calculator to evaluate your business. This is fun! Let’s try another. Using CalcXML’s calculator to evaluate your company, just enter:

• Annual earnings before interest, taxes, depreciation, and amortization (EBITDA: lets’ say $100,000)
• Excess compensation paid to owners ($0)
• Anticipated growth rate (3.0%)
• Number of years earnings are expected to continue (let’s use ten years. This is the maximum allowed using this calculator, which assumes perpetuity)
• Level of business/industry/financial risk (let’s select the Average from the following options: none, low, average, considerable, high)
• Discount for lack of marketability (let’s select 0% from the following options: -100% to 100%)

Voila! Your Midland company is worth $757,212 using this free online calculator to evaluate your business. 

Could you use these free online calculators and resources to evaluate your Midland business? Absolutely! Should you? I wouldn’t. If we start with the “lowest hanging fruit” with the above examples, the two calculators have a difference in values of $197,212. I know what you may be thinking. “You used $100,000 of net profit in the first calculator and $100,000 of EBITDA in the second calculator.” You are correct! Many small companies expense assets rather than capitalizing and depreciating them. What if your Midland business has a negative EBITDA or net profit? ExitAdivser’s value indicates a negative value, and CalcXML’s online tool does not work when you enter negative values. Also, just because your company has negative net profit or earnings does not mean that your Midland business has no value or not basis for which to evaluate it.

What other issues do I have with how these online calculators are used to evaluate a Midland business? A lot! However, I will try to boil my issues down to just a few, so this article doesn’t turn into a book. I’ll summarize my main points below:

• Industry Specific: There are no adjustments for company-specific risks when determining how to evaluate a Midland business. Generally, when valuing a company using this method, an appraiser would consider the applicable industry risk factors. Some industries are inherently riskier than others, and as such, require a higher discount rate. Higher discount rates equate to a higher capitalization multiple and a lower value. Duff and Phelps publishes industry risk premiums for almost every industry.
• Purpose: No single valuation method is universally applicable to all appraisal purposes. When determining how to evaluate a Midland business, the business owner should consider the various standards and jurisdictions that govern how to calculate and evaluate a company. None of the calculators indicated above considered the standards of value, which are directed by the purpose. The various standards of value include fair market value, fair value, investment value, market value, and intrinsic value. These calculators also do not consider if the Midland company is a going concern or in a liquidation process. All of these factors have an impact when determining how to evaluate a Midland company. 
• Long-term growth: Is a 3.0% perpetual growth rate reasonable? Generally, the expected sustainable long-term growth rate is a perpetual growth rate (into perpetuity). Many valuation analysts argue that the terminal growth rate should never be higher than the expected long-term nominal growth rate of the general economy, which includes both inflation and real growth. A good source for expected long-term inflation is the semiannual Livingston Survey published by the Federal Reserve Bank of Philadelphia. Estimating the wrong long-term growth rate, even by fractions of a percentage point, may have large effects on value. 
• Capitalization rate: A $560,000 value when using the CalcXML’s calculator to evaluate your Midland business assumes an approximate 15% capitalization rate. First, you have to tax affect net income (let’s use the corporate rate of 21%). A capitalization rate of 15% using a long-term growth rate of 3% assumes a discount rate of 12% (discount rate – long-term growth rate = discount rate). Knowing nothing about this company or what industry it serves, a 12% discount rate appears aggressively low. This discount rate is equivalent to a Midland company that has stable operations, been in business for many years, and has very little to no risks. 
• Professional Judgement: A true and accurate Midland business appraisal requires professional judgment to be used. These calculators can be entered by anyone and do not require the use of professional judgment. Professional judgment is a factor that all professional business appraisers must adhere to when evaluating a Midland company. 

To summarize, anyone can use a free online calculator to evaluate a Midland company. Many of these free resources include a disclaimer in their evaluation calculators that state, “… this tool is not the only way to appraise a business…you are strongly advised to compare your results with various alternative methods. We take no responsibility for the accuracy of the numbers you enter. Essentially, the developers of these online resources know the values are more than likely inaccurate, but they want to give you a “taste” of just how difficult this process can be. These calculators used to evaluate a Midland company also include a “contact us” page so the company can sell you an appropriate appraisal. The age-old saying “buyer beware” should strongly be adhered to. If you’re not buying, then you’re not getting.