Valuing a Company Based on Turnover
If you want to buy, grow, or sell a business, calculating its value is a key step in preparation. For a quick estimate of your company’s value, many business owners use a turnover-based valuation. This method uses a company’s turnover, or revenue, as a reference point to calculate its current value. While valuing a company based on turnover can be a helpful starting point, it is important to understand the limits of this method and how to properly apply it.
In this article, we explain how to calculate the value of a business based on turnover and when this method is appropriate. Keep in mind, a turnover-based valuation is a rule-of-thumb method that may yield unreliable results. If you need a defensible business valuation, it is best to obtain a professional business appraisal.
As a business appraiser, Peak Business Valuation provides over 30 business valuations a week for individuals across the country. Whether you are buying, growing, selling, or seeking financing, we can help you with a precise business valuation. In addition, we can answer any questions you may have. Start by scheduling your free consultation below!
What is Turnover in Business Valuation?
Turnover refers to a company’s total revenue over a set period, typically the past 12 months. In the context of business valuation, turnover is often used to assess a company’s size and performance. By applying industry revenue multiples, business owners can get a broad estimate of business value based on turnover.
This method is particularly useful when financial data is limited or profitability metrics like EBITDA or SDE are unavailable. However, turnover alone does not account for critical factors such as profit margins, risk, or customer concentration. These elements can have a major impact on the value of a business. While a turnover-based valuation offers a rough idea of a business’s potential value, it should not replace a full business appraisal.
How to Perform a Company Valuation Based on Turnover
To accurately estimate a company’s value using turnover, there are many important factors to consider. It is essential to evaluate the company’s unique characteristics and make necessary adjustments. Below, we highlight five important steps to performing a company valuation based on turnover.
-
Identify Applicable Turnover Multiples
Each industry has a standard range of revenue multiples derived from recent sales data for similar companies. For example, car dealerships often sell between 0.11x and 0.31x annual turnover, while clothing stores may sell from 0.36x to 0.51x turnover. Finding the right multiple range requires thorough industry research and assessing market conditions. After identifying appropriate multiples, you can conduct a company valuation based on turnover.
Formula: Revenue × Multiple = Business Value
For more information on multiples, see Valuation Multiples for a Small Business.
-
Adjust for Profit Margins and Cost Structures
Moreover, it is vital to account for a business’s profitability. Two businesses with similar turnover may have vastly different profit margins. A company with low costs and higher margins usually receives a higher multiple than one with tight profit margins. When valuing a company based on turnover, valuation experts may adjust the estimate to reflect the business’s cost structure and profit margins. These adjustments provide a more refined and reliable business valuation.
-
Consider Growth Trends and Recurring Revenue
Another important factor that turnover multiples do not consider is the business’s growth trends and recurring revenue streams. Consistent growth and stable revenue from loyal clients can significantly increase a company’s perceived value. Buyers are generally willing to pay more for businesses that demonstrate reliable income, long-term client relationships, and predictable growth. These variables can result in a higher turnover-based valuation.
At Peak Business Valuation, we take thorough measures to analyze all key factors that contribute to a business’s value. If you need a timely and accurate business valuation that holds up under scrutiny, we are here to assist! You can schedule your free consultation with Peak Business Valuation today by clicking below.
-
Apply Discounts for Risks
Furthermore, the value of a business can vary depending on risks that may impact turnover. Some common risks include dependency on a single client, limited geographic reach, or a weak digital presence. Businesses with a strong risk profile often receive lower valuation multiples. To avoid overvaluing a business, it is crucial to identify its risks and challenges and apply an appropriate discount to the estimate. Applying discounts can be a complex process without professional guidance. If you have any questions, reach out to Peak Business Valuation!
-
Compare Recent Sales of Similar Companies
Finally, comparing the business to similar companies that recently sold is a common way to validate a turnover-based valuation. By analyzing what comparable companies sold for in relation to turnover, you can determine whether your estimate is in line with market trends. This is a popular practice under the market approach to valuation.
By following the above steps, you can more accurately determine business value based on turnover. However, relying solely on turnover often provides misleading results. There are several variables that can affect the value of a business. The most accurate way to value a business is to receive a professional business valuation.
When to Determine Business Value Based on Turnover
Turnover is not always the best primary method for valuing a business. However, there are cases where turnover-based valuations are practical. Some common scenarios include:
- Lack of full financial records: If detailed profit and loss statements are unavailable, business owners may rely on turnover.
- Industries with predictable revenue: A turnover-based valuation can be useful when a business generates predictable revenue. Common examples include subscription-based companies or repeat-service businesses.
- Early-stage businesses: New businesses that have not yet established profitability are often valued based on turnover.
- Rough preliminary estimates: If you just need a quick, informal appraisal, a turnover-based valuation provides helpful insight.
In any case, determining business value based on turnover can be risky. As such, business appraisers often prefer valuations based on cash-flow metrics like SDE and EBITDA.
Conclusion
Valuing a company based on turnover is a simple way to generate a rough estimate of a business’s worth. For the most accurate turnover-based valuation, there are many additional factors to consider. While this method is useful in early discussions or when financial data is limited, relying solely on turnover to value a business can be misleading. If you are looking for a precise company valuation, it is vital to connect with an experienced business appraiser.
Peak Business Valuation is a professional business appraiser that values dozens of businesses every week. We can help you with a timely and reliable business valuation! Additionally, we can discuss any questions you may have on the business valuation process. To get started, schedule your free consultation with Peak Business Valuation below.
For more insight on the valuation process, check out How to Value a Small Business.
