Understanding business value creation: The Equity Valuation Multiplier

Almost 90% of companies in America have fewer than 20 employees.

Most of these businesses start as a means to be your own boss, and they often end up making you far less money than you would working for someone else.

That’s because such companies rarely rise to values much above their creation cost.

So if your business value isn’t likely to outweigh creation cost, how do you know if the company you’ve started will set you up to become “business rich?”

It all starts by understanding business value creation.

Calculating business value creation

Let’s look at one of the world’s most valuable companies:

At the end of its 2024 fiscal year, Apple’s equity valuation was worth 25x its $130 billion creation cost.

That multiple is called an Equity Valuation Multiplier and it represents the small amounts contributed by:

- Founders Steve Jobs and Steve Wozniak
- Apple’s early financial backers
- The company’s 1980 $100 million dollar initial public offering
- 45 years of cumulative corporate cash flows retained by the company

Less $700+ billion dollars in share that Apple has repurchased over the last decade.

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We can also look at the Equity Valuation Multiplier for other well-known companies.

Alphabet - 4.7x

Meta - 6.4x

Microsoft - 6.7x

Amazon - 6.5x

Berkshire Hathaway - 1.5x

I share all of these examples because as an entrepreneur or business investor, you can easily calculate this equity valuation for any company.

The Equity Valuation Multiplier Formula

Business value creation is central to the formation of financially successful companies. If you’re capable of generating equity returns that create equity market value added (EMVA), you can attract outside independent investor capital to help fulfil your growth potential.

Let’s do a hypothetical calculation to figure out how much wealth you’ve created.

In this case, we’ll assume an initial equity investment of $250,000 and current pre-tax equity rate of return at 85% with a current equity return growth rate of 6% annually.

Assume that the investment community would generally accept a current annual pre-tax return of 20%, given the risk of your company and its prospects for growth.

Current Pre-Tax Equity Rate of Return ÷ Required Investor Current Pre-Tax Equity Return = Your Equity Valuation Multiple

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Now, let’s calculate: 85% ÷ 20% = 4.5x

You have an equity value of $1,062,500, computed by your initial $250,000 investment and multiplied by 4.5x.

After you’ve recovered your $250,000, you’ve created $812,500 in wealth.

That is also your EVMA, which is your business value in excess of its creation cost.

Business Value Creation doesn’t just “happen”

The best business models enable companies to be worth more than what they cost to create, but you don’t have to start or work for a company with a strong business model to create real value.

I’ve taken three companies public on the NYSE, founding two of them, and the business value came to be 1.4x our creation cost on the last of these companies.

That value was created because we developed (not started with) an excellent business model that allowed us to grow and create opportunities for our employees and other important stakeholders.

Because business value creation does not just “happen.”

It’s a product of companies taking their offerings and wrapping them in a business model capable of delivering excellent shareholder returns.

How do they do that?

That’s what we’ll continue exploring in these articles and on my video channel.

(But if you can’t wait to find out, pick up a copy of The Value Equation to get ahead.)

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