January 09 , 2017

Does Valuing a Company Based on Revenue Alone Give an Accurate Picture?

Coming up with a valuation for a company may seem like a simple task – after all, many people think the only significant number for a business is revenue. While valuing a company based on revenue is an important factor, it is far from the only thing that business valuation professionals take into consideration when assigning a value to a company.

Several different figures and calculations come into play, and business valuation professionals use their training and experience to make certain judgments. Only after a complete assessment can a final number be tallied. Keep reading to learn some of the important factors business valuation professionals must take into account.


Valuing a Company Based on EBITDA

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is the most common and important figure, besides revenue, when coming up with a value for a business. Investors usually think of the value of a business as being in relation to the EBITDA. Business valuation professionals assess a business in a slightly different way than the investors do, but they have to keep in mind the value they come up with will likely get around to investors at some point. That’s one of the reasons the EBITDA deserves extra attention during the valuation process.

Valuing a Company Based on Revenue Growth

While total revenue matters, the rate at which the business is growing is just as important, if not more so. Successful businesses usually grow fastest in their early years; so, investors figure a business will slow its growth rate in the coming years. This is not always the case, but investors like to be cautious. That same caution applies to business valuation professionals. A healthy growth rate is imperative in determining the value of a business, but that consideration should include a hefty grain of salt.

Valuing a Company Based on Leverage (or Debt)

The amount of debt a company has is another vital factor in determining the overall value of the firm. If a business is otherwise valued at $1 million but has $1 million worth of debt, it has a net value of $0. However, this doesn't mean the business is worthless. The investors will pay $1 million dollars for the firm, but this money will go toward paying off the company's debts. When investors buy a company, they also purchase its debts. This is why the amount of debt is so important to the valuation of the business. In fact, some business valuation professionals consider it to be the biggest factor, given how much it matters to potential investors. Are you facing some important decisions that involve business valuation? Unsure whether valuing a company based on revenue is a good idea? The Burns Valuation team can help you get the facts you need. Simply call us today at 770-380-2406.