How to Value a Business Based on Revenue

How to Value a Business Based on Revenue?

Enterprise Value/ Revenue is one of the many ways of business evaluation. It is a pretty straightforward technique of evaluation. However, while using it, one must be careful, as the method can potentially result in hyped figures that may overvalue a business. Besides, revenue multiples do not consider accounting operating expenses incurred for revenue generation. Additionally, it may not reflect the operating cash flows if the company has several bad debts.

If you look forward to valuing your business by the revenue method, you must partner with a professional valuation company in India with extensive experience in startup valuation and evaluation of SMEs and larger firms. However, the below example can help you with a rough idea of the factors considered while valuing a business on revenue.

Let us consider the example of Company X and Company Y that are direct competitors, selling precisely the same products. However, company X sells a higher-quality product. Its gross sale is lesser than its counterpart, although yes, its premium quality product helps it sell the product at a higher cost and, therefore, a higher margin.

Factor Company X Company Y
Gross Sales INR 10 million INR 12 million
Sales Cost INR 5 million INR 8 million
Gross Profit INR 2.5 million INR 1.2 million
Percentage Gross Profit Margin 25% 10%
Operational Cost INR 1 million INR 1 million
EBITDA INR 1.5 million INR 0.2 million
EBITDA Margin Percentage 15% 1.67%

 

The relative valuation of Company X and Company Y can be calculated by considering an average of multiples from adequately comparable businesses.

Relative Evaluation

Multiple Industry Average Multiple Company X Enterprise Value Company Y Enterprise Value
EV/Revenue 3 2.5 0.5
EV/EBITDA 15 12 5

 

Company X is a higher margin business. The Enterprise Value (EV) based on the revenue is substantially lower than the EV based on the EBITDA multiple. Company Y is a lower margin business. Its EV calculated based on the revenue multiple is quite higher than the EV based on the EBITDA multiple.

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Valuation India is an experienced valuation firm in India with a diverse clientele ranging from startups to multinational companies. The company uses appropriate valuation techniques to help businesses know their value. To know more, connect with valuation India at +91-7722063311.

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