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$treet $mart$: How Much Is My Business Worth?

$treet $mart$: How Much Is My Business Worth?

February 28, 2023

vol. 22

$treet $mart$ (vol. 22)

Finance & Economics Focus

Launching or buying a business is an exciting adventure, but the potential for success lies in understanding essential elements such as valuations and revenue models. Having this knowledge won't just benefit us when selling or leveraging our venture - it's also indicative of our ability to create sturdy income streams. Without comprehending these fundamentals, we may find ourselves ill-prepared and our businesses at risk.

Simply put, every hour invested in our business should be yielding a future ROI. Therefore, it is critical that we strategically think about the revenue streams in our business. And be aware that the revenue model and profit margins in our business will be the guideposts future financiers will use to value our business when seeking funding, exploring a sale, or creating leverage for ourselves.

financier

[fi-nən-ˈsir]

1: one who specializes in raising and expending public moneys

2: one who deals with finance and investment on a large scale.

Revenue models and their equity multiples are crucial factors in understanding your business's current and future value. However, not all models are created equal; transactional ones generally don't fare as well as those with recurring revenues when it comes to achieving higher equity multiples. From subscription-based models to purchasing in bulk, we can choose which pricing mechanisms. And if we are smart, we can change the way our revenue models work in order to create more intrinsic value in the future.

The 4 Revenue Models

Transaction-based revenue: Revenue from sales of goods or services that usually result in one-time customer payments. Think retail shopping, real estate brokerage, and restaurants.
Service revenue: Revenues generated by providing service to customers are calculated based on time. For example, the number of hours of consulting services provided. Think Consulting, Marketing Agencies, Retainers, and Traditional Personal Training.
Project revenue: Revenues earned through one-time projects with existing or new customers. Think Contracting, graphic design, websites design & development.
Recurring revenue: Earnings from ongoing payments for continuing services or after-sale services to customers. The recurring revenue model is the model most commonly used by businesses because it is predictable and it assures the company’s source of revenue is ongoing. Think Software as a service (SaaS), Marketing, Gym memberships, online coaching platforms, email newsletters, trash/waste management.

REVENUE MULTIPLE

Experienced entrepreneurs understand that the success of businesses hinges on more than just a great idea and proven leaders - as do investors and financiers. As a result, revenue multiples by industry have become a popular way to value businesses across various sectors. This is also a great tool to measure up comparable companies.

💡

Revenue multiple

= Selling price of company / Annual Revenue

WHAT IS A REVENUE MULTIPLE?

Revenue multiples can give investors and financial analysts a bird's eye view of the profitability potential of businesses, especially those in their early stages. These ratios are built upon gross revenues to create an industry-specific 'factor' that reveals whether any given business stands out from similar public companies. With wider data sets underpinning such metrics, revenue multiples become much more reliable indicators for future success.

Smart Companies Stack Streams

Instead of focusing solely on transactional or project-based revenue, we have an opportunity to make our businesses more valuable in the long run by pursuing multiple revenue models - and if possible a recurring revenue model. Businesses like roofing, painting, and software development can deliver high-ticket contracts but they would be challenging to convert into recurring revenue.

The Highest Multiples

Software as a service (SaaS), is far and away the most scalable way to high valuation multiples. It's unique in its ability to duplicate without the need for more people power. Therefore it has an infinite scale and lots of recurring subscriptions

Whether you're looking to compare with similar companies or just trying to get started on figuring out how much something is worth, knowing these industry benchmarks may give you some useful insight.

1x – This business is dealing with products that don't promise much margin or growth – a tough road ahead!
Less than 3x – Investors interested in a reliable source of income might benefit from putting their money into businesses with an established and consistent cash flow. Many such companies are available, offering investors the chance to profit through consistent revenue streams over time.
3x to 5x – Investors are cautiously optimistic about businesses in this particular sector, viewing them as dependably decent chances for success.
More than 10x – This category is the ‘A-list’ as per investors. Businesses displaying a 10x or more valuation have the highest chances of growth, profits, and expansion. Think SaaS

How Does My Business Stack Up?

Here is a comprehensive list of Revenue Multiples by industry from eqvista.com.

Row Labels

Annual Volatility

EV to Revenue

Accident & Health Insurance

44.03%

0.98

Advertising

71.76%

9.96

Aerospace

37.30%

3.06

Agricultural Chemicals

62.18%

2.88

Air Freight/Delivery Services

43.54%

2.79

Aluminum

42.03%

1.57

Apparel

29.00%

1.77

Assisted Living Services

53.87%

4.41

Auto Manufacturing

96.23%

12.53

Auto Parts: O.E.M.

41.07%

1.76

Automotive Aftermarket

63.62%

1.57

Banks

40.35%

3.46

Beverages (Production/Distribution)

62.32%

7.85

Biotechnology: Biological Products (No Diagnostic Substances)

111.05%

17.75

Biotechnology: Commercial Physical & Biological Research

110.13%

10.33

Biotechnology: Electromedical & Electrotherapeutic Apparatus

62.78%

16.85

Biotechnology: In Vitro & In Vivo Diagnostic Substances

110.61%

6.68

Biotechnology: Laboratory Analytical Instruments

89.65%

5.03

Broadcasting

33.77%

3.49

Building Materials

68.86%

2.84

Building operators

51.84%

6.25

Building Products

76.38%

2.78

Business Services

91.84%

14.37

Catalog/Specialty Distribution

92.93%

2.54

Clothing/Shoe/Accessory Stores

74.62%

1.35

Coal Mining

64.42%

1.54

Commercial Banks

38.70%

3.24

Computer Manufacturing

65.60%

2.20

Computer peripheral equipment

83.97%

3.23

Computer Software: Prepackaged Software

112.17%

17.81

Computer Software: Programming Data Processing

0.00%

2.68

Construction/Ag Equipment/Trucks

41.67%

19.54

Consumer Electronics/Appliances

91.75%

1.95

Consumer Electronics/Video Chains

155.48%

2.24

Consumer Specialties

92.25%

1.04

Containers/Packaging

73.17%

2.09

Department/Specialty Retail Stores

83.54%

1.49

Diversified Commercial Services

50.40%

6.08

Diversified Financial Services

72.81%

5.15

Diversified Manufacture

78.36%

4.01

EDP Services

104.67%

23.45

Electric Utilities: Central

47.28%

5.72

Electrical Products

76.09%

6.01

Electronic Components

62.49%

2.23

Electronics Distribution

10.20%

2.07

Engineering & Construction

69.18%

1.09

Environmental Services

69.21%

7.16

Farming/Seeds/Milling

51.92%

2.60

Finance Companies

40.90%

0.91

Finance/Investors Services

26.05%

3.94

Finance: Consumer Services

56.96%

14.29

Fluid Controls

63.58%

3.46

Food Chains

50.46%

0.31

Food Distributors

52.08%

1.47

Forest Products

85.21%

0.51

Home Furnishings

75.83%

1.93

Homebuilding

94.44%

2.80

Hospital/Nursing Management

93.04%

1.71

Hotels/Resorts

57.54%

8.29

Industrial Machinery/Components

95.75%

6.81

Industrial Specialties

74.91%

6.54

Integrated oil Companies

61.53%

1.73

Internet and Information Services

59.87%

5.19

Investment Bankers/Brokers/Service

58.67%

8.57

Investment Managers

76.15%

6.62

Life Insurance

35.40%

2.91

Major Banks

51.71%

3.04

Major Chemicals

56.96%

3.12

Major Pharmaceuticals

59.83%

7.75

Managed Health Care

47.05%

14.97

Marine Transportation

60.64%

2.12

Meat/Poultry/Fish

54.55%

1.93

Medical Electronics

53.99%

3.86

Medical Specialties

81.53%

4.89

Medical/Dental Instruments

90.51%

10.17

Medical/Nursing Services

74.13%

3.11

Metal Fabrications

90.06%

3.98

Military/Government/Technical

78.51%

4.43

Misc Health and Biotechnology Services

0.00%

6.78

Motor Vehicles

116.73%

4.65

Movies/Entertainment

51.01%

6.51

Multi-Sector Companies

59.62%

10.34

Natural Gas Distribution

50.47%

3.55

Newspapers/Magazines

56.92%

2.00

Office Equipment/Supplies/Services

66.02%

3.66

Oil & Gas Production

62.40%

8.51

Oil Refining/Marketing

55.74%

0.93

Oil/Gas Transmission

31.62%

4.62

Oilfield Services/Equipment

67.36%

3.29

Ophthalmic Goods

95.78%

14.57

Ordnance And Accessories

77.24%

3.82

Other Consumer Services

42.07%

7.38

Other Metals and Minerals

89.21%

2.56

Other Pharmaceuticals

50.76%

0.92

Other Specialty Stores

127.77%

2.30

Other Transportation

0.00%

6.15

Package Goods/Cosmetics

70.48%

4.22

Packaged Foods

42.61%

2.17

Paints/Coatings

50.13%

2.85

Paper

41.24%

1.40

Plastic Products

41.00%

1.31

Pollution Control Equipment

54.28%

1.65

Power Generation

53.62%

4.74

Precious Metals

53.43%

2.50

Precision Instruments

50.53%

5.01

Professional Services

57.43%

2.18

Property or Casualty Insurers

46.69%

1.01

Publishing

49.14%

31.54

Radio And Television Broadcasting And Communications Equipment

123.14%

5.59

Railroads

68.00%

5.08

Real Estate Investment Trusts

75.58%

17.62

Real Estate

94.77%

12.69

Recreational Products/Toys

55.84%

2.54

Rental/Leasing Companies

87.89%

5.31

Restaurants

94.04%

6.62

RETAIL: Building Materials

66.18%

1.15

Retail: Computer Software & Peripheral Equipment

73.85%

17.18

Savings Institutions

47.66%

5.35

Semiconductors

102.78%

9.82

Service to the Health Industry

78.43%

2.00

Services or Misc. Amusement & Recreation

29.34%

5.50

Shoe Manufacturing

97.13%

2.50

Specialty Chemicals

12.36%

7.31

Specialty Foods

47.76%

4.52

Specialty Insurers

66.80%

3.01

Steel/Iron Ore

60.14%

2.19

Telecommunications Equipment

59.15%

6.19

Television Services

97.80%

5.95

Textiles

59.09%

1.50

Tobacco

30.39%

0.92

Tools/Hardware

95.34%

3.35

Transportation Services

47.51%

0.99

Trucking Freight/Courier Services

68.96%

2.00

Trusts Except Educational Religious and Charitable

21.76%

0.79

Water Supply

71.57%

5.22

Wholesale Distributors

84.71%

3.75

Key Takeaways

Launching a business requires understanding essential elements such as valuations and revenue models to ensure future success.
Revenue can be generated in various ways, from subscription-based models to purchasing in bulk.
Transactional models usually don't fare as well as those with recurring revenues when it comes to achieving higher equity multiples.
Revenue multiples are used when determining the value of a business and provide baseline results.
Businesses displaying a 10x or more valuation indicated the highest chances of growth, profits, and expansion - especially SaaS companies.
The value of your business is closely linked with your margins and revenue model.

finance

[ fi-nans, fahy-nans ] the management of revenues; the conduct or transaction of money matters generally. In our business, the finance function is about ensuring the sustainability of the business by way of managing Revenue, Expenses, Profit, Assets, Liabilities, Capital, Taxes

Best,

Samson