How to Use Revenue Multiple Valuation? Appraise a Distribution Company
There are three main methods for valuing a wholesale distribution company, but we’ve identified the revenue multiple valuation methods as the most accurate and effective one for wholesale distribution companies.
Revenue Multiple Valuation Approach
A business valuation determines the current worth of a business through an objective lens. When selling your distribution company, the best valuation approach is the revenue multiple valuation methods.
This valuation approach looks at the expected revenue (or cash flow) of the wholesale distribution business per year. We then multiply that revenue amount by the number of years the company will stay in business.
How long your enterprise will stay in business will depend on market factors, your economic factors, and other factors in the market environment. Each industry is different, but a professional business broker will use the multiplier that is standard in your industry.
We base the revenue multiple valuation approach on actual revenue your business has generated over the past few years.
For example, let’s say your wholesale distribution business is earning $100,000 a year in revenue, and you will probably stay in business for ten years (based on wholesale distribution industry trends and averages). Your distribution business value will have a value of $1 million.
So, why is the revenue multiples approach the best method for valuing a wholesale distribution business? Here are three reasons to use this method.
- It’s accurate: You might think that looking at the assets of a wholesale distribution business is the best way to determine its value, but that isn’t always the case. After all, nobody wants to buy your company for its warehouse or office space and equipment — they want the revenue they can generate.
- It can provide a range: You might want a range of what your distribution business might be worth or valued. That starts with a floor — the lowest you’ll accept — and a ceiling — the highest anyone would probably pay. A revenue multiples approach helps you come up with a range.
- It’s straightforward: It’s a quick and easy-to-understand method.
Unlike other business categories that they might go with the asset approach. However, for a wholesale distribution business, on the other hand, a revenue multiple approach is better.
Using the EBITDA multiple valuation approaches is very common too. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. By looking at EBITDA instead of gross revenue, you can come to a more accurate conclusion of a company’s value.
The revenue of the two companies might be the same. However, if one company pays more in taxes, it won’t be worth as much as the other company. Multipliers will again vary by industry.
Getting a Business Valuation
When getting a business valuation for your wholesale distribution business, a valuation advisor will consider these factors, as well as others.
- The correct business valuation method
- How new the business is
- Is the business or industry expecting growth
- Customer loyalty
- Owner dependency
Revenue Multiple Valuation: How Much is My Company Worth?
Fortunately, there are ways to get more out of your business. That’s why hiring an intermediary is so important — they can help you get an accurate appraisal and prepare for the sale by using the revenue valuation method. Here are some ways to prepare.
- Decrease liabilities
- Improve cash flow
- Get your finances in order
- Improve customer loyalty:
- Update your technology
How a California Certified Business Intermediary Can Help?
So, how can a qualified broker help before selling a wholesale distribution business process? Here are the top areas in which a business broker specialized in valuing wholesale distribution businesses in California can help.
- Accurately appraise your business
- Create a professional report
- Market to buyers
- Help you set financial and marketing goals
Summary — Revenue Valuation When Selling a Distribution Company
Have you been wondering, “How to sell my business?”
Using revenue multiple valuations and try to do a business valuation for your distribution business by yourself is pretty difficult. There are just so many factors to consider, and it’s easy to overlook a few factors that can drastically alter the value of your business.
A California-certified business intermediary can help California distribution businesses use the best method (cash flow or revenue multiple valuations) to properly value a business and help them figure out how to increase its value before selling. We’re experts in the wholesale and distribution industry, so get in touch with Rogerson Business Services, and contact Andrew Rogerson, a Sacramento-based certified business broker for more information.
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