The sales total is a starting point
Two companies can sell the same amount while having different delivery costs, overheads and cash needs. Even their revenue figures may reflect different business models or accounting policies. Before applying a shortcut, establish what the figures represent, the period covered and how they reconcile to the records.
Look at what remains after delivery and overheads
| Hypothetical annual figures | Company A | Company B |
|---|---|---|
| Revenue | £2,000,000 | £2,000,000 |
| Direct costs | £1,200,000 | £1,000,000 |
| Gross profit | £800,000 | £1,000,000 |
| Other operating costs before the illustrative EBITDA measure | £600,000 | £600,000 |
| Illustrative EBITDA | £200,000 | £400,000 |
The example deliberately simplifies accounting and ignores other valuation factors. It does not establish that Company B is worth twice Company A. It shows why the same turnover does not imply the same earnings. Both starting figures still need investigation and appropriate adjustments.
Ask how dependable the revenue is
Examine customer concentration, repeat business, contracts, renewal patterns and who maintains the relationships. A large project, a contract with no committed purchases and a repeat order history provide different evidence. Do not label revenue recurring merely because the customer has bought more than once.
Follow the cash and the operating requirements
A business may need to finance stock, customer payment delays, equipment and a growing team. Revenue growth can increase funding needs before collections arrive. Examine the operating cycle and replacement resources if the owner leaves. The earnings measure, method and assumptions must fit the business rather than follow a generic turnover formula.
When might revenue-based comparisons help?
They may form part of an appropriate analysis in some circumstances, but the evidence must address comparability, economics and the relevant valuation basis. A quoted sector multiple without its definitions and transaction context is incomplete. The engagement should explain why a method was selected and where uncertainty remains.
For the related earnings question, see what EBITDA multiples leave out. To prepare a sale, start with a defined valuation brief and a clear information pack.
Your starting checklist
- Reconcile revenue and the reporting period.
- Explain margins, customer dependence and owner responsibilities.
- Connect profit to cash, investment and the valuation purpose.
Frequently asked questions
Can I value my business just by multiplying turnover?
A calculation alone does not establish a defensible value. The method needs an appropriate basis, comparable evidence and an understanding of the business economics.
Does higher profit always mean proportionately higher value?
No. Sustainability, cash generation, risk, growth, financing and other factors affect the analysis. The illustrative companies do not imply a recommended valuation ratio.
Can a loss-making business still require a valuation?
Yes. It needs an appropriate purpose and approach, with uncertainty made clear. An earnings multiple may not be a useful starting method.
Consult EFC preparation guidance. Examples are hypothetical and do not represent client results or a company-specific valuation. Any professional work requires an agreed scope and intended use.