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The sales multiple is a type of benchmark that is used to assess the current status or value associated with a specific business. This particular business valuation method requires understanding the sales generated during the most recently completed annual period as well as a range of what are known as industrial multipliers. The goal of the sales multiple is to obtain an accurate assessment of the current market value of the company, and how that current value relates to past performance and the goals of the business as it moves forward.
In order to properly arrive at the sales multiple and evaluate a business properly, it is important to understand what is meant by an industrial multiplier. In terms of relating to business activity, a multiplier makes it possible to identify shifts or changes in an industry from one period to the next. The multiplier is normally expressed as a number range and is determined by taking into account a number of factors that are relevant to a given industry. Once this range is identified for the period under consideration, identifying the sales multiple involves multiplying the annual sales revenue by that multiplier. The formula is thought to provide a reasonable understanding of the current position of the business within its market, making it easier to determine if the company has lost market share or posted some gains gains in the marketplace during the annual period under evaluation.
Calculating the sales multiple provides several benefits for the company. One has to do with using the valuation to determine how well the company is doing in terms of moving closer toward its goals. For example, if one of those goals is to capture a certain percentage of the market over the next ten years, calculating the multiple will provide information about whether the pursuit of that goal is on track, or if the company did not capture the desired amount of goal in the most recently completed annual period. Knowing the sales multiple in this scenario can allow owners and managers to develop strategies that will result in increasing market share enough during the coming year to offset the events of the previous period and keep the company on schedule for ultimately gaining its desired market share.
Identifying the sales multiple can also be helpful in terms of assessing the position of the company in relation to new and established companies that in the marketplace. This can be important, since part of the process of preparing for determining the multiple involves analyzing the sales of similar businesses. Often, this will help make the company aware of increases in competition from other companies, allowing the business to take action that protects the current market share from eroding and possibly capturing market share in upcoming periods from those competing companies.