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.
|Multiple||Industry Average Multiple||Company X Enterprise Value||Company Y Enterprise Value|
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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