Using the P/S Ratio to Assess a Lucrative $5M Business Exit

From Main Street to Wall Street

Executive Summary

Imagine adding an extra $500,000 to a client's business sale just by leveraging a simple, yet powerful valuation tool. This case study details how using Golden Door Asset's Price-to-Sales (P/S) Ratio Calculator helped one business owner demonstrate a higher valuation, potentially netting a substantial profit increase and showcasing the value advisors can bring using modern AI-powered tools. Further, proactively planning the wealth management on the back end to capture tax savings can make that extra revenue go even further.

The Challenge

For Registered Investment Advisors (RIAs) and wealth managers, one of the biggest challenges – and opportunities – lies in providing holistic financial planning that extends beyond traditional investment portfolios. Clients are increasingly seeking advisors who can offer expertise across a wider range of financial decisions, including business valuations, exit strategies, and sophisticated tax planning. According to a recent Cerulli Associates report, over 60% of high-net-worth individuals expect their advisors to provide guidance on complex financial matters like business sales, yet only a fraction of advisors feel adequately equipped to handle these requests without relying on external specialists, creating friction and potential loss of assets under management (AUM).

Many business owners, like the one in this case study, operate under the assumption that their business valuation is solely determined by its asset base. However, this approach often overlooks the significant value generated by ongoing revenue streams and future growth potential. When advisors fail to demonstrate a more comprehensive valuation, clients risk leaving money on the table during a sale, potentially losing hundreds of thousands of dollars. This not only impacts the client's financial well-being but also reflects poorly on the advisor's ability to deliver optimal results, leading to potential client dissatisfaction and loss of future business. In an era of fee compression and increasing competition, advisors can't afford to leave any value unrealized for their clients. Every opportunity to add tangible value directly impacts client retention and referral rates.

The consequences of inadequate business valuation are far-reaching. Beyond the immediate financial loss during the sale, clients may also miss opportunities for strategic tax planning post-sale, further eroding their wealth. In the wake of the DOL fiduciary rule, RIAs have a heightened responsibility to act in their clients' best interests. Failing to provide comprehensive valuation services, which leads to a lower sale price or missed tax optimization opportunities, can expose advisors to increased scrutiny and potential legal liabilities. Therefore, advisors need access to tools that empower them to confidently address complex valuation scenarios and protect their clients' financial futures.

Our Approach

Golden Door Asset’s Price-to-Sales (P/S) Ratio Calculator provides a streamlined and objective approach to business valuation, empowering RIAs to demonstrate the true value of their client's business. This tool goes beyond traditional asset-based valuations by incorporating revenue generation and growth potential into the equation. Here’s how it works:

1. Data Input: The advisor inputs the client’s company's total revenue for the most recent fiscal year and the proposed selling price.

2. P/S Ratio Calculation: The calculator instantly determines the company's P/S ratio by dividing the proposed selling price by the total revenue. For example, a $5 million selling price and $2 million in revenue results in a P/S ratio of 2.5.

3. Comparative Analysis: The advisor compares the calculated P/S ratio with industry averages of publicly traded companies or recently sold private businesses in the same sector. Golden Door Asset provides access to industry data through integrated data feeds, making this step efficient and reliable.

4. Justification of Valuation: If the client's company has a higher P/S ratio than the industry average, it indicates that the company is undervalued at the proposed selling price. This provides a data-driven justification for increasing the valuation. The platform allows the advisor to generate reports including this data for client presentations.

5. Tax Optimization: By integrating this valuation with our Tax Equivalent Yield calculator, advisors can take the next step of helping business owners proactively plan their wealth management strategy, identifying tax-efficient investments to further maximize the proceeds of the business sale.

What sets Golden Door Asset’s P/S Ratio Calculator apart is its accessibility and ease of use. Unlike traditional valuation methods, which often require complex financial modeling and specialized expertise, this tool provides a user-friendly interface that allows advisors to quickly and accurately assess business value. This approach integrates seamlessly into an advisor’s existing workflow. The calculator can be used during initial client consultations to assess the potential value of their business, as part of ongoing financial planning to track business performance, or during the exit planning process to negotiate a higher selling price. The tool is designed to augment, not replace, the advisor's expertise, providing them with a powerful tool to enhance their service offerings and strengthen client relationships.

Technical Implementation

The Price-to-Sales Ratio Calculator is built on a robust and secure technology stack designed to handle sensitive financial data with utmost care. The core calculation engine is developed using Python, leveraging libraries like NumPy and Pandas for efficient data processing and statistical analysis. The user interface is built using React, a modern JavaScript framework, to provide a responsive and intuitive user experience.

The calculator integrates with various financial data providers, such as Refinitiv and FactSet, to access real-time and historical data on publicly traded companies and private market transactions. These data feeds are ingested through secure APIs and stored in a PostgreSQL database, ensuring data integrity and accessibility. Data transformation and cleaning are performed using ETL (Extract, Transform, Load) processes to ensure data accuracy and consistency.

Security is paramount in the design and implementation of the P/S Ratio Calculator. All data transmitted between the user interface and the backend is encrypted using TLS 1.3. The application is hosted on AWS (Amazon Web Services) infrastructure, which provides robust security features, including firewalls, intrusion detection systems, and regular security audits. Access to the calculator is controlled through role-based access control (RBAC), ensuring that only authorized users can access sensitive data. Golden Door Asset adheres to industry best practices for data privacy and compliance, including GDPR and CCPA. The platform undergoes regular penetration testing and vulnerability assessments to identify and address potential security risks. Furthermore, all data is stored in compliance with SEC and FINRA regulations, including data encryption at rest and in transit.

Results & Impact

The primary ROI impact of using Golden Door Asset's P/S Ratio Calculator is the potential increase in the selling price of a client's business. In the case of the manufacturing business owner, leveraging the calculator to justify a higher valuation based on a P/S ratio aligned with industry averages could increase the selling price by 10%, netting an additional $500,000 on the $5M sale. Further, the Tax Equivalent Yield calculator can also unlock additional savings. For example, if the business owner uses that $500,000 capital gain and invests in municipal bonds, yielding a 2% tax savings, that translates to an additional $10,000 saved post-sale.

Beyond the immediate financial gain, the P/S Ratio Calculator also delivers significant secondary benefits. By demonstrating a data-driven approach to valuation, advisors can enhance client trust and satisfaction. This leads to increased client retention and higher referral rates. The tool also helps advisors comply with their fiduciary duty by ensuring that they are acting in their clients' best interests and maximizing their returns.

Here's a summary of the key metrics:

By streamlining the valuation process, the P/S Ratio Calculator also saves advisors valuable time. Traditional valuation methods often require extensive research and analysis, consuming significant resources. With Golden Door Asset’s tool, advisors can quickly generate accurate valuations, freeing up their time to focus on other critical tasks, such as client relationship management and business development. The increased confidence provided by a data-backed valuation also makes advisors more effective at negotiating on their clients' behalf.

Key Takeaways

• Don't rely solely on asset-based valuations: Incorporate revenue generation and growth potential to determine the true value of a business.
• Leverage industry benchmarks: Compare your client's company's P/S ratio with industry averages to identify potential undervaluation.
• Use data to justify higher valuations: Provide data-driven evidence to support your valuation recommendations and maximize client returns.
• Embrace technology: Utilize AI-powered tools to streamline the valuation process and save valuable time.
• Think holistically: Incorporate tax planning into the exit strategy for your client to ensure you maximize their returns.

Why This Matters for Your Firm

In today's competitive landscape, RIAs and wealth managers need to differentiate themselves by providing comprehensive and data-driven financial planning services. Golden Door Asset’s P/S Ratio Calculator empowers you to confidently address complex valuation scenarios, unlock hidden value for your clients, and strengthen your client relationships. By embracing innovative technology, you can enhance your service offerings, attract new clients, and increase your firm's AUM.

The case study presented here demonstrates the tangible benefits of using Golden Door Asset’s tools. By helping one business owner potentially increase their selling price by $500,000, we showcased the power of data-driven valuation. Imagine the impact you could have on your clients’ financial futures by leveraging our AI-powered solutions. We encourage you to explore our full suite of tools and discover how Golden Door Asset can help you elevate your practice and deliver exceptional value to your clients. Visit our website or contact us today to schedule a demo.