Valuing a Business with Only Gross Sales: Key Metrics for Acquirers

When valuating a business with only gross sales and no income, acquirers focus on various key metrics to assess the potential value and growth potential. This blog post will explore the most significant metrics that acquirers consider and provide insights based on the specific circumstances of the business.

Revenue Growth

One of the paramount considerations for acquirers is the revenue growth trajectory of the business. A larger and faster-growing business is more attractive because it indicates a sustained market demand and solid momentum for future earnings. Revenue growth is the primary driver of valuations, as it shows the potential and scalability of the business.

Gross Margin Growth

Gross margin, which represents the difference between the price of the product and the costs of acquiring the raw materials, is another crucial metric. Maintaining and increasing the gross margin is essential as it signals a differentiated business with a strong competitive advantage. A higher gross margin allows the business to control pricing and maintain profitability even during market fluctuations.

Sales Per Employee

This metric illustrates the efficiency with which a business generates sales relative to the number of employees. A higher sales per employee indicates that the business is effectively leveraging its human capital to boost revenue. This number can vary significantly by industry but a higher figure is generally more desirable to an acquirer. Efficient sales generation is vital for maintaining profitability and scaling successfully.

Sales Per Square Foot

This metric is particularly important for physical retail businesses. It helps acquirers understand the efficiency with which a business utilizes its real estate. Higher sales per square foot indicate a better use of space, leading to higher profitability. This can be a critical factor for acquirers as it directly ties to the bottom line and the business's ability to scale.

Customer Acquisition Cost

The customer acquisition cost (CAC) is the total sales and marketing expenses divided by the number of customers acquired during the same period. This metric is essential as it helps acquirers understand the capital required to scale the business. A lower CAC is generally more attractive, indicating a more effective and cost-efficient marketing strategy.

While these metrics provide a solid framework for assessing the value of a business, additional information is necessary to form a precise valuation. Small businesses with revenues under $5M are typically valued using multiples of sellers discretionary earnings (SDE) and revenue. However, if the SDE is zero, the valuation must rely solely on the revenue multiple, which can be risky.

If you're planning to sell your business, you'll need to address several key questions:

How will you make debt payments if financing is involved? What can you bring to the table to ultimately turn a profit? What is the market value of the assets and inventory?

Based on these factors, your business valuation should be somewhere between the asset/inventory value, if you're unsure about the first two questions, and the revenue multiple if you have the financial strength and wherewithal to profit from the acquisition.

Remember, a well-rounded valuation considers all aspects of the business, including its financial health, market position, and growth potential. This approach ensures that the business is adequately valued and that the acquirer has a clear understanding of its future prospects.