There are five factors that determine the valuation of most wholesale businesses:
* Nature of Business: Banks tend to avoid lending to certain types of businesses. Typically, they try to steer away from cash-based businesses. This lack of access to capital dampers future expansion opportunities and lowers the value of the business.
* Barriers to entry: Distribution businesses with a barrier to entry over an industry receive higher valuations. For example, company car dealerships have higher valuation multiples than used car dealerships because they’re more exclusive. Therefore, lenders consider the former credit worthy and less risky.
* Location: Businesses in states with a strong economy have higher valuations. Similar businesses located in the rust belt are valued more than their counterparts located on the East or West coast. Generally, banks lend more willingly to businesses in states with higher economic growth.
* Client Mix: Institutional clients add value to a company. Lenders will match 90 percent of Accounts Receivables with a blue chip client roster – much more than if it were solely retail clients.
* Revenue Distribution: Businesses with a client that accounts for more than 15 to 20 percent of revenue lower the company’s value. Also, outstanding accounts receivables should not exceed 90 days, unless the client list consists of blue chip companies.