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

Samson Jagoras 28.Feb.2023

$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