how to value a business based on turnover

How to Value a Business Based on Turnover: A Simple Guide

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When it comes to selling or buying a business, one big question always comes up—what is it really worth? There are many ways to figure that out, but a lot of people start by looking at how much money the business brings in. That’s called turnover. It’s one of the simplest ways to get a rough idea of value. This method is often used when full financial details aren’t available or when profits vary too much.

In this guide, readers will learn how to value a business based on turnover step-by-step. It’s written in plain language, with examples anyone can follow. Whether someone owns a small shop or is looking to buy one, this method can help them understand the real worth behind the numbers.

What Does “Turnover” Mean in Business?

Turnover is the total revenue a business earns from selling its products or services during a certain period, usually a year. It’s also called sales or gross income. But don’t confuse it with profit. Profit is what’s left after all the bills and costs are paid. Turnover is just the top number—the total amount coming in before anything is taken out.

For example, if a bakery sells $150,000 worth of cakes in a year, that’s its turnover. It doesn’t matter how much the ingredients or rent cost in this case. We’re only looking at the sales total.

Understanding turnover is important because it gives a clear idea of a business’s size and earning power. It’s also the base number used when figuring out value through the turnover method, which is common in industries like retail, restaurants, or service businesses.

Why Use Turnover to Value a Business?

Not every business has perfect books. Some don’t even show much profit. But that doesn’t mean they aren’t valuable. That’s where turnover-based valuation comes in.

Using turnover is often quicker and easier than other methods. It works well for small businesses, startups, or businesses with high sales but low reported profits. It’s also useful when buyers or sellers don’t have full access to detailed financials.

Turnover-based valuation gives a rough but fast snapshot of value. It’s not perfect, but it’s handy—especially for industries like retail, food service, or consulting, where income is steady and predictable.

This method focuses on how much money flows into the business, rather than how much is left after expenses. In simple terms, it values potential. The more money a business brings in, the more someone might be willing to pay for it—assuming it can keep earning that amount.

How to Value a Business Based on Turnover (Step-by-Step)

Here’s the core of it—how to value a business based on turnover in a few simple steps.

Step 1: Find the Annual Turnover

This is the total revenue from all sales in a year. You can check financial statements or bank records to get this number. Just be sure to exclude tax or one-off income. You want regular, real turnover.

Step 2: Research the Industry Multiple

Every industry has a “multiple”—a number used to multiply against turnover. This number shows how businesses like yours are usually valued. For example, a coffee shop might be valued at 0.6x turnover, while a tech agency could go for 1.2x.

These numbers come from past deals and market trends. You can find them in industry reports, business broker listings, or by asking experts.

Step 3: Apply the Formula

Now multiply the annual turnover by the industry multiple.

Example:
If a cleaning company earns $300,000 a year and the industry multiple is 0.8x, then:

Business Value = $300,000 x 0.8 = $240,000

That’s the estimated worth based on turnover.

Industry Multiples for Turnover-Based Valuation

Different businesses use different multiples. It depends on how risky or steady the industry is. Here are some rough examples:

  • Retail Stores – 0.4x to 0.7x
  • Restaurants and Cafes – 0.3x to 0.6x
  • Marketing Agencies – 0.8x to 1.2x
  • Software or SaaS – 1.0x to 3.0x
  • Consulting Firms – 0.6x to 1.0x
  • E-commerce – 0.5x to 1.0x

Higher multiples usually mean higher growth potential or less risk. Lower multiples mean more risk or slim margins.

Also, don’t just pick a number from a blog. Try to use real, local data from recent sales. Talk to brokers, accountants, or business owners in your niche. One decimal point can change your valuation a lot.

Mistakes to Avoid When Valuing a Business by Turnover

This method is simple, but people often mess it up. Here’s what to watch out for:

1. Using the Wrong Turnover

Make sure you’re using net sales, not total income with tax or one-time deals. If the business had a big spike from a one-off project, leave that out.

2. Guessing the Multiple

Don’t just pick a number because it sounds right. Use industry data, or ask someone who’s sold a similar business recently.

3. Ignoring Debt or Liabilities

Turnover tells only one side. A business might look valuable but still owe a lot of money. Always look at debt separately.

4. Forgetting About Profit

Yes, this method skips profits—but it doesn’t mean profit doesn’t matter. If two businesses have the same turnover but one is losing money, it’s not worth the same as the one that’s earning well.

Turnover vs Other Valuation Methods

Valuing a business by turnover is quick. But it’s not always the best method. Here’s how it stacks up against other common methods:

EBITDA-Based Valuation

This method looks at earnings before interest, taxes, depreciation, and amortization. It’s more precise, but also more complex.

Asset-Based Valuation

Used for businesses with lots of equipment or property. It values what the business owns, not what it earns.

Discounted Cash Flow (DCF)

This one estimates future earnings, then brings them back to present value. It’s great for big or stable companies but takes time and detailed forecasts.

When Turnover Works Best

  • Small businesses
  • Simple models
  • Low overhead
  • Limited access to full accounts
  • Service-based or retail sectors

If things are messy or fast-moving, turnover can give a fair starting point.

Final Tips to Get an Accurate Business Valuation

Here are a few last things to help get it right:

  • Check multiple years of turnover to see if sales are steady. A one-year boost doesn’t mean it’ll last.
  • Use real industry data for your multiple, not just guesses.
  • Hire a business valuer or broker if things feel too uncertain. They know the market better.
  • Combine methods if you can. Start with turnover, then compare with EBITDA or asset value for balance.
  • Clean up your books. Neat records help justify your number to buyers.

Remember, any valuation is only as good as the info behind it.

Also Read: How to Buy Out a Business Partner: A Complete Guide

Conclusion

Learning how to value a business based on turnover is a smart move for any owner or buyer. It’s not the only method, but it’s one of the easiest to start with. It gives a quick snapshot of what a business might be worth—based on how much money it brings in.

Turnover tells a story. It shows whether people are buying, and how steady the flow is. But it’s not the whole story. Smart buyers dig deeper. Still, for small business deals or early talks, turnover-based valuation gets the conversation going.

If you’re thinking about selling or buying a business, this method can give you a solid first number. Just make sure to double-check the math, do your research, and know what the numbers are really saying.

FAQs

1. What does turnover mean in business valuation?
Turnover is the total sales or revenue a business earns in a year before any costs are taken out. It’s often used to estimate value quickly.

2. Is turnover the same as profit?
No. Turnover is the total income from sales, while profit is what’s left after all expenses are paid.

3. Can I use turnover alone to value any business?
Turnover works well for small or simple businesses, but it might not show the full picture for complex companies with big assets or debts.

4. What is a good turnover multiple?
It depends on the industry. Some sectors use 0.3x, while others go up to 3.0x. Always check industry averages before using a multiple.

5. Why is turnover used instead of profit in some valuations?
Some businesses have inconsistent profits or limited financial records. Turnover gives a clearer, faster snapshot of performance.