How to Value a Wholesale Trade
The wholesale trade industry distributes goods from various industries to downstream markets such as retailers and manufacturers. In recent years, the wholesale trade industry has seen healthy revenue growth, generating over $11 trillion. According to IBIS World, we can expect continual growth in the coming years. As such, now is a good time to buy, grow, or sell a wholesale trade business. Whether you are entering or exiting the wholesale trade industry, it is beneficial to learn how to value a wholesale trade.
To learn how to value a wholesale trade, it is best to obtain a business valuation. During a business valuation, you will learn about the strengths and weaknesses of a wholesale trade business. In addition, a business appraiser will determine the fair market value of your wholesale trade. This can help you take the next steps in maximizing the value of a wholesale trade.
As a professional business appraiser, Peak Business Valuation values wholesale trade businesses across the country. We are happy to provide you with a business valuation for a wholesale trade. In addition, Peak can answer any questions you have on how to value a wholesale trade. Schedule your free consultation today to get started!
How to Value a Wholesale Trade
When valuing a wholesale trade, valuation experts consider a variety of business valuation approaches. Often, business appraisers rely on the market approach and/or the income approach. Both of these approaches are effective, however, each uses a different basis of valuation. As such, business appraisers will determine which method is best as part of the valuation process. This may include using a combination of business valuation approaches to value a wholesale trade business.
Valuing a Wholesale Trade Using the Market Approach
The market approach is a common method for valuing a wholesale trade. To understand the market approach, think of the real estate appraisal process. When valuing a home, real estate appraisers assess similar properties that recently sold in the area. This allows the expert to determine a fair value for the home. Similarly, business appraisers look at similar businesses on the market when valuing a wholesale trade with the market approach. If the business is privately owned, business appraisers gather relevant data from private transaction databases.
Multiples for a Wholesale Trade
When utilizing the market approach to value a wholesale trade, business appraisers work with valuation multiples. These are financial ratios that measure the value of a business based on metrics such as cash flow, earnings, and sales. To find the appropriate valuation multiples for wholesale trade, business appraisers apply the proper NAICS or SIC code. In the following section, we discuss SDE, EBITDA, and REV multiples for wholesale trade.
SDE (Seller’s Discretionary Earnings) Multiples for a Wholesale Trade Business
- The SDE multiple is common when valuing a wholesale trade business. This multiple measures the value of a wholesale trade in relation to its seller’s discretionary earnings.
EBITDA Multiples for Wholesale Trade
- EBITDA multiples represent a wholesale trade’s earnings before interest, taxes, depreciation, and amortization. This helps the business appraiser understand the return on investment (ROI) a wholesale trade can generate.
REVENUE or SALES Multiples for a Wholesale Trade Business
- REVENUE or SALES multiples measure the value of a wholesale trade based on the total amount of revenue or sales it generates.
To learn more on how to value a wholesale trade using the market approach, see Valuation Multiples for Wholesale Trade.
Valuing a Wholesale Trade Using the Income Approach
Another common valuation approach is the income approach. When using the income approach, business appraisers assess the income potential of a wholesale trade. In addition, the income approach considers the risks associated with buying, expanding, or selling a wholesale trade. Below, we highlight a few common risks.
- Machinery and Equipment: Wholesale trade businesses may use a variety of machinery and equipment depending on the industry. To operate successfully, it is important to acquire high-quality machinery and equipment. Additionally, operators may consider obtaining a machinery and equipment appraisal.
- Location: The location of a wholesale trade has a strong influence on its value. Wholesale trade businesses should locate near key markets such as retailers and manufacturers.
- Competition: The wholesale trade industry is competitive and extremely fragmented. To succeed, operators must find ways to differentiate from competitors.
- Financial Strength: Operating a wholesale trade can come with high overhead expenses. As such, it is important to have strong financial planning and budgeting skills in a wholesale trade business.
Methods to Value a Wholesale Trade Using the Income Approach
Under the income approach, there are many different methods for valuing a wholesale trade. The most common income approaches are the capitalization of cash flow method and the discounted cash flow method. These valuation approaches analyze a wholesale trade’s earning potential. In the following paragraphs, we discuss how to value a wholesale trade using the capitalization of cash flow method and/or the discounted cash flow method.
Capitalization of Cash Flow Method
The capitalization of cash flow method is ideal if your wholesale trade has an extensive and stable history. This method involves determining a reliable amount of income for one period. The income is then divided by a capitalization rate. This indicates the rate of return an investor can expect from a wholesale trade business. The capitalization of cash flow method also assesses the risks associated with a wholesale trade business.
Discounted Cash Flow Method
The discounted cash flow method is best for wholesale trades with strong financial histories and/or reliable forecasts. When using the discounted cash flow method, future income is projected over a 3-5-year period. Then, a valuation expert applies a discount rate to the income to account for the time value of money. Please note that the discounted cash flow method is less common since it is limited to future income estimates which can be inaccurate.
Whether you are purchasing, expanding, or selling a wholesale trade, it is helpful to learn how to value a wholesale trade. There are a variety of business valuation approaches to consider when valuing a wholesale trade. To understand which approach is ideal for your wholesale trade business, obtain a business valuation. As part of a business valuation, you will learn the fair market value of a wholesale trade and what drives it. With this information, you can begin to build a successful wholesale trade business.
Peak Business Valuation, business appraiser, is here to help! We work with wholesale trade businesses regularly. As such, we are happy to provide you with a business valuation for a wholesale trade company you are buying or selling. Peak can also answer your questions on how to value a wholesale trade business. Start now by scheduling a free consultation with Peak Business Valuation below!