Are you thinking about selling your company in the near future and are concerned about some of the metrics you need to have your eye on to set yourself up for a successful sale? You’re not alone. There are plenty of different things to think about in preparing your business for a healthy and effective sale. It is important to look at business turnover because this is a useful measure of the overall health of a company, but too often, it is misconstrued with profit.
If you are thinking of buying a business, you will also need to learn how to value a business using turnover as reported by the selling company.
Financial Turnover
When you position your company as available for sale, you’ll need to do everything possible to present the strongest financial picture to an intended buyer who knows the value of a business on turnover for certain periods. Turnover, of course, is distinct from profit. The turnover is the total business volume and income during a specific period of time, or the net sales figure.
Profit
Profit refers to the earnings that are left over after all the expenses have been deducted. A buyer of your business will likely be interested in both the turnover and profit. Recognize that there are two different ways that profit can be measured: Gross Profit & Net Profit.
Gross Profit = Net Sales – Cost of Goods Sold or Services
Net Profit = Gross Profit – Operating and Administrative Expenses
Turnover Rate
Not to confuse this with business turnover, in business, the turnover rate refers to the number of employees who left the organization in a given financial year or over a period of time. It’s helpful to know your own employee turnover rate so that it can be included in the financial picture of your company when you prepare it for sale.
Let us delve deeper into what is business turnover value and how it is used by companies who are looking to sell.
In simple terms, the business turnover value is the total sales generated by the company in a given period. It can also be referred to as Gross Revenue. For a buyer, it makes sense to value business based on turnover if the company is still new or if the operations are simple.
If you do not know how to value your business based on turnover, there are competent business brokers who can help you with this.
When you decide to prepare to sell your business, knowing the correct value of your business is important. That said, there are many ways to get your business valuation and probably the easiest method is to value a business based on turnover.
How to value a business based on turnover? It’s very simple. Here are the steps:
It must be noted that valuing a business on turnover will only make sense if the business has an uncomplicated structure. This method does not work for all types of businesses.
So now the most important question for you is how do you value a business based on turnover? We use a formula for this as shown below:.
Business Turnover = Weekly Average Sale * Generally Accepted Sector Multiplier
Where:
Weekly Average Sale = Total Sales in Operation / # Weeks Business is in Operation
Note: If the business is Vatable, the VAT amount must be removed from the calculation
Generally Accepted Sector Multiplier:
The revenue multiple used is not definite but only serves as a general guideline accepted for the use of computing the turnover. For example, the multiplier used for coffee shops or cafes is 20 weeks.
If we compute the business turnover of a coffee shop for sale assuming they have a weekly sales average of $12,500, then the business turnover is $250,000 ($12,500 * 20 weeks).
A common question that is asked frequently by business owners to business brokers is, how do you value a business on turnover? This question was already answered in the section above but this method of valuing a business is not a definite measure.
Outlined below are some of the factors that can affect the value of a turnover that solely relies on business based on revenue.
Does Not Show Business Profitability
The annual turnover on sales alone is not a measure of profitability. There are still several factors that must be considered such as cash flows and operational efficiency.
Business Turnover Value Can Sometimes Not Be Realistic
If the valuation of the business is based solely on sales and its related industry multiplier, then the value of the business computed can turn out to be unrealistic. Some industries use high multipliers even if the weekly sales average is low and this can skew the result.
Diverse Revenue Streams
Computing the turnover can be challenging if a business has multiple revenue streams. However, this is beneficial for the seller of the business because this is one of the ways to ensure that the business is stable.
Industry Benchmarks
The business turnover requires an industry multiplier to compute its value. Since the turnover refers to only the total sales, then having to benchmark the turnover value to similar industries can be more reliable as compared to using general benchmarking criteria.
Incomplete Financial Records
The most important data to compute for the turnover is the sales report. Not having the right financial record will affect the entire business turnover computation.
Future Profitability
Business turnover is computed based on historical data. What is not included is the growth potential of the business. Without including this in the criteria for business valuation, then the pricing of the business will not be as reasonable as it should be.
Now you have learned how to value a business on turnover, it is now time to interpret these numbers. In many cases, when intended sellers reach out to us to get help from a business broker, they already have a strong financial picture and many of the details gathered. Deciding whether now is the right time to sell your company and the appropriate method of business valuation could lead you back to the drawing board to look for some ways that you can tweak the overall success of the business so that it is in the best possible position to be sold at a future date.
Having the turnover number alone is not enough to determine the value of the business. To better interpret it, other factors must also be taken into consideration such as:
Undeniably, the valuation of business based on turnover is an effective way of conducting a business valuation.
Our business brokers are thoroughly experienced in helping many different business owners move through this process and get the support that they need. Contact our knowledgeable business brokers to discover more about whether now the right time is to sell and the steps that you can take to prepare yourself.
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