Value your life like a business


Wait, what is this you say. Why on earth would I compare the gift of life to a commercial enterprise?

Well, while I agree that life is about so much more than money, for the sake of a different perspective bear with me for a moment and consider what your life’s value would be if it was a business.

Now there are many ways to value a business, revenue multiples, EBIT and EBITDA multiples, P/E multiples, asset valuation, discounted cash flow analysis and the list goes on. Many papers and books are penned on the subject.

For our approach, let us use a P/E multiple combined with Net Tangible Assets.

What is a P/E Multiple?

P/E stands for Price to Earnings. The Earnings part is the profit after tax that a business attains in a year, the Price is the value of the business. P/E is often used to compare stock exchange listed companies. E.g. you might have a company worth 100m that makes 10m a year, the P/E multiple would be 10x. If you are trying to establish a value using a P/E multiple, you decide upon a multiple then apply it to the profit after tax.

What are Net Tangible Assets?

Basically Cash + Assets – Debt.

Why choose a P/E multiple combined with Net Tangible Assets?

Without getting too far into the merits of various valuation methods, a P/E multiple is simple and takes into account tax and expenses. But on its own it doesn’t take into account how much stuff you have. If someone were to buy you (slavery is illegal and ethically repugnant), then they would have to pay for both the value of your stuff and your future earning potential.

What multiple should we choose?

A single life has a lot of what is called ‘key-person risk’. In business you have this sort of risk when much of company’s operations are dependent on one (or several) key person(s). In these situations you typically apply a lower multiple. Say you buy something that relies on one main sales guru, you buy it at P/E multiple of 5. You should get your money back in five years if profit remains steady. However, if that one main sales guru leaves the business stops making money. Hence, a purchaser is not willing to pay a very high multiple for a business with ‘key person risk’. Accordingly, for this article we will choose a low P/E multiple of 4. To incorporate NTA, your worth as a business = Profit p.a x 4 + NTA.

Applying the P/E multiple

To get the P/E multipple we don’t just take annual salary and times it by four. That would be a revenue multiple. Nor do we take earnings after tax and times it by four which would be something like net profit before expenses and taxes. No, to get a multiple we should take the amount you can save per year. This is effectively your profit after tax as a person and the nub of this line of thinking.

Income p.aSavings p.aP/E Valuation at 4x
Hypothetical Person 1200k20k80k
Hypothetical Person 275k18k72k
Hypothetical Person 3120k0k0k

Applying the NTA

AssetsDebtP/E ValuationCombined Valuation
Hypothetical Person 11.4m1.2m80k280k
Hypothetical Person 2250k072k322k
Hypothetical Person 3600k680k0k-80k

So what perspective does this open up?

To me it helps build the idea that your income is only powerful if it is more than your spending rate. It also can get you thinking about how to value side hustles, raises and other income streams. If you can increase your savings rate by 10k and side hustle out a passive income stream of 5k after tax then you could increase the notional value of your life as a business by 6ok. Just a thought.