Can a company value be established based on its gross receipts? In the language of business appraisal this question is addressed by the so-called market approach. Under this approach to valuation you are actually comparing your company to other similar businesses that have sold recently.
You can do such comparison by reviewing the business selling prices in relation to their gross receipts or revenues. The ratio is known as the gross revenue valuation multiple.
Once you have come up with the valuation multiples you can apply them directly to your company’s gross receipts figure to calculate the estimate of your business value.
When is the value derived from the company’s gross receipts a good indicator of what it is worth? Here are the typical situations when you may want to consider using this valuation technique:
- Professional practice valuation
- Valuation of a rapidly growing company that has not been managed for maximum profitability
- Whenever changes are planned that are likely to alter the business costs considerably
- As an initial valuation that can be refined at a later date
- When the returns and discounts are not significant for the company
Business brokers often use gross receipts as the quick measure on which to base their initial valuation for business clients. This enables them to establish a ballpark number to start with and share with the owners. This number can then be revised as the business selling strategy takes shape.
Be prepared to defend your valuation based on gross receipts as you share your results with others. Investors and partners may question this number based on how they see the company’s profit potential.
In other words, you may need to revisit your business value figure by offering valuation based on the company’s earning potential or its asset base. To do so, you can resort to a number of valuation methods that are based on the business income and assets. In some instances, your results may surprise you and indicate business value that is considerably higher or lower than your figure based on the company’s gross receipts.