Best Calculations: How to Value a Wholesale Distribution Business
If you are selling your distribution business and need to know how to value wholesale distribution business, read on to learn some of the best business valuation techniques.
How to Calculate Wholesale Distribution Business Value
When you are selling your wholesale distribution business, you have to know the ins and outs of how to value a wholesale business. And while it may sound simple in concept, the details can get tricky.
There are many specific calculations that a qualified business intermediary specializing in the wholesale distribution business industry (business acquisition and sale). Still, in general, there are three main approaches to business valuation:
Because any one of these alone can be misleading, a business broker will take all of them into account. The official process for doing this is called a Broker’s Opinion of Value, and it will take all of these approaches into account.
See also: How to use revenue multiple valuations to appraise a distribution business.
Calculate Enterprise Value
When trying to value wholesale distribution companies, it is helpful to use valuation multiples. Valuation multiples are tools that allow you to make a ratio between two different financial measurements. And especially during listing a business for sale, it is best to use enterprise value multiples, or EV multiples, as your business valuation method. See this guide to learn more.
Enterprise value multiples allow you to value a distribution business by calculating the entire market value. It takes the enterprise value and compares it to another metric, giving you an even more accurate picture of value.
But before you can make that ratio, you need to calculate the enterprise value (sometimes called the firm value). The enterprise value formula works by adding together the market capitalization and the market value of the debt while subtracting the liquid cash or equivalents.
And there is a reason that you subtract cash: cash sitting in a bank account is not considered part of the business’s operations.
As an equation, it looks like this:
- Market capitalization + Market Value of the debt – Cash
That equation is the basic idea of enterprise value. However, in its more complex form, it also considers preferred stocks and minority interests. Once you have calculated the enterprise value for the wholesale distribution business in California, you are now ready to use EV multiples.
Since you now know that Enterprise Value multiples are the most appropriate multiples to use during the sale of your company, let’s dig deeper into what EV multiples are and how to calculate the business value using EV multiples.
EV multiples are a ratio between the enterprise value and another financial metric, and they come in many varieties. The most common EV multiples are EV/Revenue, EV/EBITDAR, and EV/EBITDA.
- EV/Revenue is calculated by dividing the enterprise value of a wholesale distribution company by its annual revenue. It is best for newer businesses.
- EV/EBITDAR is the ratio of the enterprise value to the earnings before interest, tax, depreciation & amortization, and rental costs.
- The EV/EBITDA multiple is comparing a company’s EV with its earnings before interest, taxes, depreciation & amortization. It is often used to compare two companies.
Because they are valuation multiples, they each compare and make ratios between the enterprise value and some other financial measurement. The key is knowing which multiple is most appropriate to calculate the business value for selling your distribution business.
The EV/Revenue is best for newer companies because if a company does not yet have earnings, then the other valuation multiples simply can’t work. The EV/EBITDA, on the other hand, is primarily taking cash flow into account. When a wholesale distribution business has a sizeable cash flow, then the EV/EBITDA is extremely useful.
For the rest of this article, we will dig deeper into the benefits of using EV/EBITDA and how to calculate it.
Calculating EV/EBITDA for Finding the Value of a Wholesale Distribution Business
Since you have the basic idea about how to calculate the California wholesale distribution business or enterprise value, let’s get into the details of how to calculate the EBITDA factor.
The first part, EBIT, is the earnings before interest and taxes. This element is vital because taxes and interest can dishonestly skew a company to seem more or less valuable. For example, tax policies in a particular country can distort a business’s value. And interest payments can similarly skew the impression of value.
The last two variables, DA, are depreciation and amortization. Depreciation is the expense a company charges itself when it purchases something, such as a piece of equipment or property. Amortization is essentially the same, except it applies to any kind of intellectual property instead of physical property.
To calculate the business value, in short, the EBITDA calculation is considered to be a substitute for cash flow. This metric measures the performance of a company before other factors affect the result. These other factors—the interest, taxes, depreciation, and amortization—can all mislead the actual value of a company.
Essentially, the EBITDA is removing the factors that a business controls itself. The result is that it leaves behind a more accurate and helpful number.
And the formula for calculating the EBITDA is a simple concept. It involves going backward from the net earnings before other factors affect it. So the formula looks like this:
- EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Once you have the EBITDA, you can now compare it with the enterprise value (EV) to make the EV/EBITDA multiple. When you are asking the question: “how to sell my distribution company?” The EV/EBITDA multiple, in particular, will tell the business broker whether the company is overvalued or undervalued.
Finally: Understand Business Valuation Techniques
The wholesale and distribution industry is filled with business acquisitions and sales. And as you can see, there are three main techniques to calculate business value—income, market, and assets— that are required before you can sell a distribution business valued between $500k to $4m.
Many of the approaches or calculation techniques by themselves are misleading, which is why using all of the valuation approaches is necessary—they help cancel out each other’s weaknesses.
But if you are selling your distribution company, hopefully, this article convinced you to use the EV/EBITDA multiple. This cash flow/revenue approach to valuation is one of the best ways to accurately value a wholesale distribution business in the State of California.
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