You have been building a successful small business for years, but don’t know how to add more value. Through a business valuation, you can discover areas of growth you may otherwise not have known. One of those opportunities for growth deals with revenue streams.
When growing your business, it is important to understand how your revenue streams will impact the value of your company. The following points explain how a valuation expert will assess revenue streams when determining the value of your business.
Revenue is a Key Performance Indicator
When performing a business valuation, a financial analyst will analyze a company’s performance. One of the key indicators they consider is revenue. As previously discussed, there are many revenue streams. As part of the valuation process, Peak Business Valuation, a business appraiser in Utah, identifies the primary revenue streams of the company and how each impacts value. If requested, we are happy to dive deep into various revenue streams that would increase the value of your business long-term.
Useful for Benchmarking a Business
Revenue streams are also useful in determining a benchmark value for the business. An appraiser or business valuation analyst typically considers revenue or the total amount of money generated by a business’s activities. This is sometimes referred to as the “top line” because it does not deduct any expenses. The analyst then compares the company revenue to that of similar selling businesses to get a benchmark value of the business.
Revenue Streams Provide Predictable Financial Performance
Through understanding the revenue streams, a financial analyst can then track the pattern of cash inflows. This helps identify trends, causes, and changes in the revenue. Financial analysis can then provide a meaningful explanation of any variances.
One of the most predictable revenue streams is recurring revenue. This is because there is consistency in cash inflow from a loyal customer base. The owner can also forecast revenue and create budgets with a higher degree of certainty.
In contrast, transaction-based and service revenue tends to fluctuate with customer demand. As such it is more difficult to predict. Seasonality also plays a major part in the variability in sales of goods and services.
The most volatile and risky revenue stream is project revenue. Since it is largely dependent on customer relationships. To maintain this revenue source, a company invests considerable time building relationships.
Forecasting and Assessing Risk Using Revenue
Depending on the type of revenue streams a company uses, the next step in the valuation process is the development of different forecasting models. These models consider various risk factors. The valuation expert adjusts these models for revenue predictions and patterns. Except for recurring revenue, the company’s other revenue streams create forecast models that look quite different from month to month as revenue changes. Whereas with recurring revenue, a valuation expert can more accurately forecast revenue months in advance.
Using a Revenue Multiple to Determine Company Value
Lastly, a valuation expert utilizes revenue when calculating valuation multiples. The revenue multiple is a ratio that measures a company’s value based on its total sales. Many company’s sell based on a revenue multiple. For instance, accounting, professional, and financial services often transact on a revenue multiple.
A valuation expert will determine the revenue multiple through the following process.
The analyst applies the revenue multiple by the most recent 12-month period of revenue to get an implied value of the business. The calculation is as follows:
Revenue X Multiple = Value of the Business
For instance, if a company generates $650,000 in revenue and transacts at a 0.46x multiple, then the business value is worth approximately $299,000.
$650,000 X 0.46x = $299,000
This calculation is straight forward. However, some companies do not transact on a revenue multiple. The reason being a revenue multiple does not take into consideration the operations of a business. Depending on the industry and business, different multiples may be more applicable. When using multiples, be sure to consult with a valuation professional to determine what analysis would be best for your company.
Peak Business Valuation, a business appraiser in Utah, can help you as a business owner understand how revenue and revenue streams impact the value of your business. Through a business valuation, you can gain a more comprehensive understanding of your business. A valuation expert can help identify ways to improve revenues, diversify revenue streams, and decrease expenses. To schedule your free consultation, click the link below or reach out via email.