BusinessApril 18, 2022by Gabriel

Valuation Metrics: What You Should Know

Every entrepreneur needs certain tools to navigate, see clearly and go towards the business goal. Without navigation tools and the right metrics, the business owners are wandering around, like a lost traveler in the Sahara desert.

One of the best tools is a real-time dashboard which shows important valuation metrics in a business. Gathering all of the metrics, will help the entrepreneur determine how much his casino business is worth.

Continue reading this article, and you’ll find explanations for core valuation metrics, which you need to use and know in order to succeed.

4 Important Valuation Metrics

There are plenty of casino website owners who don’t even think about how much their business is worth, until they decide to sell. Many times, this type of approach will often lead to low business values and stress, than if they took the other route: keeping an eye on their valuation metrics, and planning ahead.

Most common and important metrics are the following:

  • Growth rate
  • Seller’s Discretionary Earnings (SDE)
  • Profit margin
  • Number of revenue streams

There are other metrics available for different industries, the above are, in my opinion, the best valuation metrics.

SDE (Seller’s Discretionary Earnings) = a business’s profits before deducting expenses that aren’t necessarily transferred to the new owner. SDE shows the amount of money a new owner can expect to earn, after acquiring the business.

Seller’s Discretionary Earnings is the most important metric which is used by buyers or brokers to determine a business’s value.

To understand the paramount importance of SDE, it’s important to understand how the valuation process works.

Let’s dive into the importance of understanding how the valuation process works and see why SDE is important when performing the business valuation.

online casino business

The Business Valuation and Its Importance

SDE is one of the most common and important valuation metric for most online businesses. Most online casino websites are using the SDE multiple method.

To put it in simple terms and in a summary, this valuation method is very simple to use and understand:

You take the SDE of an online business, and multiply it by a number (known as “Valuation Multiple” or “Multiple”).

As you’ll see in detail below, there are many factors which are involved with determining the SDE and the multiple.

One important fact to note is: certain companies are valued differently, even though the SDE multiple method applies to most online businesses.

In other cases, applying the EBITDA multiple or equity multiple, can determine the fair market value of a business.

Another example which I can give you: medium or large software firms will use the revenue multiple method. Meaning revenue will replace SDE. This method of valuation will be typically used when revenue is the more important metric than SDE – in the eyes of the Seller or Broker.

The SDE multiple method will still apply for most of the online businesses.

Business Growth Rate

When an experienced Seller or Broker is looking to find out what is the business value; the growth rate of the business always plays an important role in determining the valuation multiple.

The growth rate of a business is included in four primary areas which Buyers typically look at when they are looking to invest in a new online business.

Investors are always looking at the growth rate of a business, if it’s an upward trend, they will be excited to acquire online businesses. Private equity firms and investors are willing to spend more money if a business is having promising growth.

As you will see further, there are two important metrics to discuss:

  • Revenue growth
  • SDE growth

Revenue Growth

Revenue growth usually indicates longer-term success and viability. The above two important metrics: SDE and revenue growth are often associated with one-another, but there are significant differences between them.

It’s quite common that some companies will invest heavily in their customer acquisition efforts, and their revenue growth can outpace their SDE growth – and in some cases it can do so significantly.

Let’s take a SaaS business as an example. The start-up SaaS business will reinvest a large Capital Expenditure (CapEx) each month in order to acquire customers which would bring profit for the company in the long-run through annual recurring revenue.

In such a case, the start-up SaaS company will profit from rapid revenue growth, and unchanged SDE. Such online businesses are valued at a higher multiple because of the higher future earnings, which are expected to grow or materialize.

SDE Growth

If an online business has consistent and positive SDE growth, the future or new owner will reasonably expect the online business to earn more income in the future than at the current stage. The new owner can experience a significantly higher ROI (Return on Investment) – depending on the SDE growth rate.

If the SDE growth rate has value, it will be important for the Seller to value the business at a higher multiple.

Taking a look at it, from a completely different perspective, assuming the business has a negative net income trend, investors or buyers will be cautious. No investor will buy an online casino business which will end up being very unprofitable in the near future. Let’s not forget that, some online businesses with a negative SDE growth can be sold at a much lower multiple.

Profit Margin

Arriving at a solid conclusion when discussing profit margins. When a business has a healthy profit margin, it will indicate the level of stability and high growth potential of the business.

The high margins of a business will surely suggest that the owner of the business has been optimizing all of the processes.

Most of the time, when looking at businesses with high margins, investors will come to a conclusion that the business offers a unique product or service which positions the business in not making changes to its pricing and engaging in different wars with the competitors.

When the Seller owns an online casino business with high margins, investors (after purchasing the business) will have amazing opportunities, because there is more money available to reinvest in the business, experiment with marketing strategies or other paid marketing methods to increase sales and acquire new customers.

High margins will be good proof of business stability, because the new owner will have more space to experiment with marketing efforts. On the other hand, slim margin invested in advertising costs or other “new” costs could be a bad idea for the entire business and jeopardize the online business model.

Smart investors will often pay more because they’ve analyzed the healthy margins, for the reasons explained above.

Revenue Diversification

Lower risk means more interested buyers or investors for a particular online casino business. It’s not recommended to have only a single revenue stream, when you’re doing business, as it will present itself as a vulnerable business, than a business with multiple streams of income or different earning methods implemented by the Seller or current owner.

Let’s imagine that you’re an online entrepreneur owning an Amazon business, and at one point in time, you decide to sell the Amazon business. Important to note: your online Amazon business only sells one product, which earns $100,000 per month. This means you’re sitting on one single product, which can be impacted in numerous ways by different events. One impact or hit on the business, will result in you losing all revenue. Again, potential buyers or smart investors will be cautious.

The opposite is totally different. Allow me to explain, using the Amazon business. If your business sells ten or more products on Amazon, and each product generates $10,000 per month, your revenue will be the same as in the first example, but will present a lower risk on your balance sheet. Assuming one product will be hit by one bad event, you’ll stop selling that one product, lowering your monthly revenue with $10,000 each month. When you look at the balance sheet, you’re left with $90,000 monthly revenue.

Smart people who own online businesses, are usually improving their methods and adding multiple revenue streams to their income, in order to help with business goals and business stability.

valuation metrics

Advantages and Disadvantages

When it comes to the valuation process, some valuation metrics have limitations and some are very helpful for establishing the fair value of a business.

Advantages of operating with Valuation Metrics

Smart buyers need to have access to key valuation metrics, which will help them make the final and the important decision. The buyer or investor needs to understand growth rate, discounted cash flow, cash flow and other significant & important metrics.

Valuation metrics provide objective and clear understanding of how much a business is really worth.

The below (other) valuation metrics which will prove important for a publicly traded company, which aren’t too relevant for most online businesses:

  • Market capitalization
  • PE ratio
  • Earnings yield
  • Dividend yield
  • Earnings ratio
  • The PEG ratio
  • REIT valuation ratio

Using valuation metrics will allow investors to gain insight into the assets which they’re considering purchasing to expand their online businesses and streams of income.

It’s important not to rely on assumptions and guesswork.

With the help of valuation metrics, investors can compare previously sold online businesses, and what’s currently on the market, with the current business which they are considering to acquire.

Potential buyers will only benefit if they are using different valuation tools and if they understand the marketplace. High-value investors will always look to compare companies, and check out other assets which are appealing to them. It is hard to know which asset to purchase without performing proper valuation. Investors use analysis to compare each company which they intend to buy.

Disadvantages of only operating with Valuation Metrics

The true value of an online business cannot be determined only by valuation metrics (which of course are important and necessary part), there are other variables which play important roles in the equation, such as: YoY (year-over-year) SDE growth rate, which can be expressed as 10%, 30%, 50%, 100%, etc).

Transferability – is another pillar of value, which translates in: how easily the new owner can transfer the business to his company name or his own name. There is no statistic which can reflect how transferable a business is – transferability is an extremely important factor or element in a business’s valuation.

Buyers shouldn’t look only at the valuation metrics, when it’s time to make investment decisions, as there are more crucial variables that do not qualify as “metrics”.

I strongly suggest buyers or new investors to get help from an experienced business advisor, which can effectively  explain and be quite helpful with the process. The quality of the information received by the potential buyer is crucial, and business valuations are considered more art than a science.

How to Calculate Valuation Metrics

Business investors or buyers with decision making power establish criteria based on various valuation metrics. Same as the stock market investor, using stock criteria for investment decisions.

After you’ve learned individual valuation metrics, which show as an important factor for your business, it’s time to move forward and learn how the valuation metrics are calculated.

Let’s discuss about the four primary valuation metrics:

  • Seller’s Discretionary Earnings (SDE)
  • Growth rate
  • Profit margin
  • Revenue diversification

How to Calculate SDE (Seller’s Discretionary Earnings)

SDE (Seller’s Discretionary Earnings) are calculated by taking the next steps:

  1. Establish the business’s pretax earnings
  2. Add any interest expenses and subtract any interest income
  3. Add any non-cash expenses
  4. Add one-time investment expenditures
  5. Subtract non-operating income and add non-operating expenses
  6. Subtract any discretionary expenses incurred by the business owner
  7. Add depreciation and amortization expenses
  8. Add a single owner’s compensation

As mentioned previously (at the beginning of the article), SDE is the pre-interest, pre-tax profits before deduction of one-time investments, non-cash expenses, non-related income or discretionary expenses and owner’s benefits.

How can Buyers Calculate The SDE Growth Rate

Here is how to calculate SDE growth rate: subtract the past SDE (example: 2021’s SDE) from current SDE, then divide by your past SDE.

Assuming your growth rate is positive, the equation will favor you, with a positive number and positive results. Next is to multiply that number by 100 – you’ll end up with the SDE growth rate expressed as a percentage.

How to Calculate The Profit Margin

The profit margin is calculated the following way: subtract the Cost Of Goods Sold (COGS) from the net sales. The result will show you the gross profit. Next step is to determine the gross profit, which can be calculated as dividing that number by your net sales, then multiplying it by 100. Resulting in the gross profit margin. Business owners love to talk a lot about this financial metric.

Calculating your net profit margin can be done using the same formula: substituting your net profit for gross profit.

Revenue Diversification

It is possible to evaluate an online business’s revenue diversification using different methods. One common way for casino service providers is looking at the number of clients who help the company’s revenue, generating revenue for the casino business.

Valuation Metrics Helping Buyers with Business Decisions

By using valuation metrics when making business decisions can surely provide clarity, below are listed a few core benefits:

  • Increased stability
  • Increased growth
  • Owning a more valuable business

Growth is definitely an important goal, and is always essential to examine it. This primary metric of success will help buyers and investors truly understand what is needed to be done, and what kind of actions should one take in order to create a more profitable and stable online casino business.

With these metrics you can pay more attention to a company’s values, and you can easily identify aspects of the online business which can be improved over periods of time.

Making decisions which will help improve the value of a business are important, and should be taken seriously when using valuation metrics. If at some point in time, you decide to sell your online casino business, you’ll be grateful that you’ve built your business with value in mind, as it will help you decide the asking price, and it will make it easier for the buyer to make business decisions.

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