How Small Businesses are Valued in India: Revenue Multiples Explained.
Assuming you have considered selling your business or finding an investor to provide funds for the business, you have likely heard the term "revenue multiple" thrown around. It is technical, and, frankly, most business owners switch off the minute numbers and finance lingo come into play. However, the point here is that knowing how small business is valued in India can be the difference between leaving money on the table and walking away from a deal with the feeling that you have gotten what the business really deserves.
We will simplify this into simple terms.
What is a Revenue Multiple, Anyway?
One of the most common methods of applying a price tag to a business is a revenue multiple. It is nothing but a figure, multiplied by your revenue per year, to obtain an approximate estimation of your worth.
Thus, when your business makes annual profits of 1 crore, someone will attribute your business to be worth 2 crore. Simple, clean, and widely used - particularly when dealing with small and medium businesses, where profits may be haphazard or even hard to establish.
However, this is what most individuals do not tell you, that multiplier is not constant. It moves. And knowing why it moves is where things really become interesting.
The reason why revenue multiples differ so much.
The valuation of two businesses with identical revenue may be different by a great deal. One of them may fetch 1.5x and another 4x. Why?
Industry is of enormous importance: The business with SaaS (software-as-a-service) will have greater multiples since the revenue is predictable and recurring. An investment, such as a trading company or a retail store, however, may receive a lower multiple due to the fact that the revenue is more unpredictable and reliant on customer traffic or even supplier relations.
Trajectory of growth is a significant factor: when your revenues increase 40 percent/year, a buyer is in fact buying the future, not the present. It is more difficult to sell a business with flat revenues, and that is stagnant.
Customer concentration is a silent killer: When two clients can generate 60 percent of your revenue, then you have a risk. This is observed by buyers, and the multiple is decreased. Spread across 50 clients? That is stability, and the multiple is pushed up by it.
Profitability and margins do not disappear: Revenue multiples do not occur in a vacuum. The buyer will never look at your EBITDA (earnings before interest, taxes, depreciation, and amortization). Unprofitable high revenue is much less preferable to average revenue with good profits.
The Ground Reality of how small businesses are appreciated in India.
Technology startups are frequently valued at 10x or even 20x revenue in the Western world. India is another scenery. The manner in which small firms are priced in India shows the realities in the Indian market, risk-taking among Indian investors, and overall maturity of the business environment.
In the case of most small enterprises - an example is a manufacturing plant in Pune, a distribution company in Ahmedabad, or a regional logistics company - the multiplicity of revenue is normally between 0.5x and 3x. In the case of digital-first or tech-enabled businesses, it may be 3x to 6x or more, depending on the growth story.
The sectoral breakdown is rough, as shown here:
Conventional retail/trading: 0.5x -1x.
Manufacturing (non-tech): 0.8x - 2x
Businesses that deal with services (consulting, agencies): 1x - 2.5x.
Tech-enabled/SaaS companies: 3x - 7x.
D2C brands that are well represented online: 2x -5x.
These aren't hard rules. They are the points of departure of a negotiation.
What are You Doing to Improve Your Multiple?
This is the one that nobody is discussing enough - you can, in actuality, make a better valuation before going to market.
Get your books straight: There is a great menace of informal accounting in small businesses in India. Provided that your financials are not clean, audited, and well documented, buyers will be discounting the multiple by merely the fact that the risk is increased.
Get rid of reliance on the founder: When the business is operated by you, as an individual - your contacts, your experience, your day-to-day participation - then it is far less sellable. Construction of buildings, recruiting effective managers, and record keeping. Get the business to operate without you.
Streamline your revenues: introduce products, new markets, and new customers. Not only to grow, but to show strength.
Display repeated or shrunken revenue: Long-term contracts or clientele based on retainer, even in non-tech companies, are an indicator of stability. Buyers will give a premium on that.
A Final Thought
Valuation is a science, storytelling. The figures are important, but so is the story that you create about your business. Investors and acquirers are investing in a future - and it is your role to ensure that the future is attractive, believable, and risk-free.
You may be five years before your exit, or you may simply be wondering where you are. Taking the time to learn these fundamentals today would place you in a much better spot when that time comes. It is changing rapidly how the Indians value their small businesses - and the people who know the rules of the game are the ones who will play them best.