Sales are often a good starting point for estimating a company's value. The idea is to multiply sales by a sector coefficient to obtain an approximate, simple and rapid value. But is this approach really relevant and justified, or does it mask significant distortions?
1. Enterprise value and sales: the sales multiple, a seductive but misleading simplicity
Many people recognize the "x times sales" method as an express benchmark, particularly popular in sectors where profitability is low or unstable:
- In tech startups, some observers are talking about multiples of up to 8× sales, or even more in exceptional cases.
- For a traditional SME, applying a generic multiple (e.g. 3×) to sales of €500,000 would give a value of €1.5 million. It's simple, understandable by turns (see our article on the famous tax scale!) but without any rigorous foundation.
In reality, this model ignores the fundamentals:
- Profitability: two companies generating the same sales can have very different margins - some of them almost zero.
- Indebtedness: sales do not provide any information on the financial structure, which is essential to correctly assess the value of shareholders' equity.
- Intangible and tangible assets, development potential and sectoral differences are totally absent from the mechanics.
The sales multiple only serves as an initial assessment, never as a reliable estimate for a transaction or a financial audit.
2. Towards more robust methods : EBITDA or combined approaches
The most widely used valuation method consists of using a multiple of EBITDA (adjusted EBITDA) multiple. In France, for SMEs :
- Très petites entreprises (EBITDA < 0,5 M€) : multiples entre 3,5× et 4,5×
- SMEs (0.5-2 M€ EBITDA): 4.3× to 5.5×.
- Medium-sized companies (€2-5m): 5.0× to 6.4×.
- Large SMEs (>€5m): 6.0× to 7.5×.
These standards, to be measured in the first half of 2024, provide more reliable benchmarks for assessing a company's actual performance.
For fast-growing companies or those in a ramp-up phase - such as software publishers - the EV/CA approach can make sense, with high multiples (up to 12×) justified by expected future profitability. But this requires a proven growth structure and established margins.
3. The growth vs. profitability dilemma: a benchmark for investors
In practice, many people refer to a threshold of 20-30% annual sales growth when choosing between a sales or EBITDA multiple:
- If growth exceeds this threshold, investors focus on the sales multiple, betting on scalability and rapid expansion.
- Below this level, we return to EBITDA, which reflects profitability and the ability to generate cash.
In the SaaS sector, the "40% rule" is sometimes applied: if the sum of sales growth rate and EBITDA margin is greater than 40%, the profile is perceived as favorable to a sales-based valuation.
4. XVAL: a hybrid, rigorous and adapted approach (company and sales valuation but....)
At XVAL, we avoid the pitfall of ready-made formulas. We combine complementary methods, adapted to each company's profile:
- Sector analysis to determine the right multiple benchmarks (sales or EBITDA).
- Restated EBITDA calculation: taking into account adjusted costs, depreciation, financial structure, etc.
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Dual approach :
- EV/EBITDA to estimate going concern value ;
- EV/CA for future potential (based on projected growth and margins).
- Multi-method combination: sector comparison, discounted cash flow (DCF) and asset-based methods where applicable.
- Produce a clear, easy-to-read report explaining assumptions, margins, projections and valuation methods.
5. Comparative case in retail: same sales, two value realities
Business value vs. sales, let's take two downtown businesses, each with annual sales of €800,000:
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Business A: an own store, with a rent of €1,500/month, well optimized in terms of purchases, with a stable team and low operating expenses.
→ Gross margin: 62%
→ Total expenses: €280,000
→ EBITDA = €216,000
→ At a multiple of 4.5×: value ≈ €972,000 -
Business B: same sales, but in a very expensive high street (rent €6,000/month), unstable team (high turnover), poorly negotiated purchases.
→ Gross margin: 55%
→ Total expenses: €460,000
→ EBITDA = -€20,000
→ Even if we value sales at 0.5× (conservative coefficient), value ≈ €400,000
👉 Yet, to an outside observer or an unsophisticated buyer, the two businesses might seem equivalent on sales alone. In reality, one generates solid operating cash flow, while the other is loss-making.
Conclusion - Company value or valuation in relation to sales
Sales are a good indicator of a company's size, but their value is not automatically proportional to their turnover. A reliable valuation requires an examination of profitability, growth, financial structure and market prospects.
At XVAL, we put our expertise at the service of solid, personalized valuations, combining financial rigor, sectoral understanding and strategic projection.
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