How do you Value a Business Based on Turnover in the UK?

Valuing your business can give you an insight into its financial health, and help you make important decisions for the future. Whether this means selling up, expanding or moving in a bold new direction, you need hard figures to base your decision on.

However, business valuation can be complex. In this guide, we’ll look at how you can potentially make it easier – by valuing your business based on turnover alone. This can give you a good idea of how much your business is worth.

What are the ways to calculate the value of your business?

There are a number of different ways to accurately value your business¹.

The first is sales-based or turnover-based valuation. You can carry out your valuation using a price to earnings ratio (P/E), basing the valuation on multiples of profit. This method is most often used for public companies with an established record of profit and repeat earnings.

Other valuation methods include:

Entry cost valuation

In essence, this is the figure it would cost to set up a similar business to yours. It includes all startup costs and tangible efforts, plus the cost of building a customer base, training employees and developing products.

Asset valuation

This is most often used to value businesses in manufacturing and property, as these typically have lots of tangible assets. It’s a good method for established, stable businesses. Asset valuation involves working out the NBV (Net Book Value) of the business, including the value of all assets with depreciation taken into account.

Discounted cash flow

This method is more complex, and is best used for well-established businesses with predictable cash flows. It involves making assumptions about cash flow in the future, estimating what it would be worth today.

Is valuation based on turnover a good value indicator?

There’s no ‘one size fits all’ method for valuing a business. It often depends what industry you’re in, as well as the specifics of your particular organisation.

Valuing your business based on turnover is a good shortcut if you want to quickly put a price tag on your business. It is a good indicator of the popularity of your products, and how well sales are going. If you’re a new business or have an uncomplicated setup, this could be the right method for you.

However, sales-based valuations don’t tell you much about operations efficiency, or your costs or investments. Assets aren’t taken into account, along with things that are tricky to measure. For example, the company’s reputation, relationship with clients or the strength and skills of your workforce.

If you want a greater degree of accuracy and a valuation that takes more of these things into account, it could be a good idea to combine valuation methods.

How to value a business based on turnover

Ready to get started? There are a couple of different valuation methods you can use, starting with the simplest.

Turnover valuation²

Follow these steps:

1. Find your average weekly sales. You can do this by dividing the total turnover for the financial period by the number of weeks (leaving out VAT). You can even include the previous financial period if the data is available, remembering to divide by the increased number of weeks.

2. Multiply by your sector value. The next step is to multiply your average weekly sales by the number of weeks that equates to a fair value for the business. This varies by sector, so for a hair salon it’s between 10 and 15 weeks, while for restaurants it could be as many as 30 weeks.

The total formula to remember is: (turnover / number of weeks) x sector multiple = business valuation.

Let’s do a quick example.

Say you’re a hair salon with a turnover of £75,000 in the last tax year. You’ll divide this by 52 weeks, making your average weekly turnover around £ 1,442. If your sector multiplier as a hair salon is 12, this makes the turnover-based value of your business £17,307.

Price to earnings ratio (P/E) valuation³

To work out your company value using P/E, start by choosing an appropriate P/E ratio to use.

This can be complicated, as it depends on the sector, size, history and performance of your business. However, most businesses use a P/E ratio of between 4 and 10, with a higher figure used for companies with high forecast profit growth or a record of repeat earnings. Here are a few examples:

• Owner managed businesses typically have a P/E of 0 to 2.5
• Small businesses with profits up to £500K have a P/E of 2 to 7
• Small enterprises with profits over £500K have a P/E of 3 to 10.

The P/E ratio can also be calculated by dividing the price per share by the earnings per share.

To find your company value, simply multiply your P/E ratio by your post-tax profits for the year.

The formula for P/E valuation is simply: profit x P/E ratio = valuation.

To help you see how it all works, let’s do another quick example.

We’ll use the same hairdressing business earning £75,000 a year, although remember that P/E valuation is most often used for public rather than private companies. If we give the business a P/E ratio of 2 (as an owner-managed business earning less than £500K), this makes the value of the business £150,000.

As you can see, this gives you a quite different valuation compared to the first example. This is why using a variety of valuation methods, and choosing the right fit for your particular business, is so important. What’s right for another business may not be a suitable option for yours.

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After reading this guide, you should have a better idea of the different methods you can use for valuing your business. You can do it based on turnover alone, as a quick and easy way to put a figure on what your company could be worth.

But make sure you don’t sell your business short. It could be worth putting more time into it – or even getting a professional valuation – to get more accurate insights.

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Sources used:

1. Simply Business blog post
2. USCITA blog post
3. Direct Line for Business blog post

Sources checked on 21-December 2020.