Valuation using Future Sales
The company’ sales can tell you the size of the business and its position in the marketplace. Sales are generally more steady and easier to predict than profits and cash flows. This method can be used to value a loss-making business, a business with a strong brand and a business with consistent recurring sales. It’s based on the idea that an efficient operator can purchase the company at a depressed price relative to its sales level and make it more profitable through superior business practices and marketing techniques.
This method requires you to project the sales 5 to 10 years from now and multiplies the estimated sales by an appropriate price to sales ratio (PSR) to get the future value of the business. This value is then discounted back to present value using an appropriate rate of return to get the value of the business.