Valuing a Business Based on Sales

Need help valuing your business based on sales? Look no farther, Emerald Coast Business Brokers can help!

How exactly do I value my business based on sales?

This is probably one of the questions most commonly asked by business owners. And though it is common for owners to need this information to sell their business, it is also natural to simply want to know the value of your business, just to see how your company is doing.

Valuing a business based on sales

While there are certainly many different ways to determine a businesses value, and many different ways of defining itself, this post will focus on valuing the business based on sales. The most accepted way of valuing a business based on sales is a very simple formula: (firm’s annual sales) x (given multiplier) = value of business based on sales.

Calculating your businesses sales

Sales are the cash flow, or income that a company produces after all the expenses have been accounted for. The best way to determine your companies sales is to look at all sales generated by your business in a given time period, let’s say a year. After seeing how many sales there were in a year, we come up with a number “x.” Then, you would determine the number of any missing goods/products, returns, or discounts allowed, and come up with the number “y.” The formula x – y = (firm’s annual sales) would then show the total amount of sales generated by a company within that given year.

How to calculate a multiplier

A multiplier depends on not only the type of industry the business deals with, and how predictable the sales are year to year. Often times the multiplier is a starting point, then you will adjust the multiplier based on the specifics of the company in question. For example, say the multiplier initially is twice the company’s sales, and they have seen consistent growth over a few years; the consistent growth would then raise the multiplier to 2.5. If that same company had an initial multiplier of 2, but half of the company’s billings are made up by client, the risk factor would then decrease that multiplier to 1.5.

Factors affecting the multiplier

While it may seem that the multiplier is a random number generated by a business owner, or company broker, there is actually quite a lot of statistics and economics that go into determining not only the multiplier but also the factors that can raise or lower that multiplier. Most small, profitable, healthy, businesses will sell within a range of 2.5 to 4.5 ranges. Furthermore, other factors that can lower a multiplier include: one, or few customers making up a major portion of the sales; major investment needed soon in equipment; pending legal or government action. Factors that can help raise a multiplier include: diversified consumer base; strong management team, with few key personnel; financial ratios at, or above national average.

So why would you need a business broker?

Although most of this information can be found in books, articles, and online, it is rarely recommended that you attempt to determine the value of your business without seeking professional help – especially if you are in the market to sell it. A good analogy would be taxes: almost anybody can do their own taxes, however to do them the best possible way, most people would hire a professional tax specialist. The same rings true with selling a business. A professional can make sure you’re not missing anything. A good business broker will:

• Know the local market that your business will be operating in – a company selling on the Emerald Coast will require a totally different method of approach versus a business in Texas, or California.

• Understand the multiplier adjustments – as stated before there are several various factors that can either raise or lower a given multiplier, a good business broker will understand these factors, as well as how to adequately use them to value your business.

• Calculate your net sales – while it may seem simple when dealing with your sales, if you start working on a time scale of several years, the numbers can begin to get very complicated. A good business broker will help you understand, and work with your numbers in a more efficient way.

Chose Emerald Coast Business Brokers

The brokers at Emerald Coast are well trained, and know their business inside and out. These specialists will be able to take your company and help calculate your value based on sales, as well as any other definition of value, with no stress to you as the owner.