The single most important number for a prospective buyer is the "net cash flow", "adjusted net profit", "seller's discretionary earnings" ("SDE") -- basically, what ends up in the owner's pocket. But, the next important number is the Gross Annual Sales. Unless, there is a strategic buyer who is already in the industry and/or knows the intricacies of the seller's business. Then Gross Annual Sales is the paramount number; because, the strategic buyer knows what net revenue will be generated from the acquired gross when the purchased business is integrated into the buyer's existing business. And, that could be very different than the "bottom line" experienced by the seller.
Gross Annual Sales is probably the simplest indicator that a business owner uses to express their opinion about the success of their business. The higher the number the great the pride of the seller.
For this reason, Gross Annual Sales can be the most misleading. Which business would you prefer to own? A business with $5,000,000 in Annual Gross Sales with an Adjusted Net Income of $20,000 or a business with $2,000,000 in Annual Gross Sales and an Adjusted Net Income of $350,000?
Also known as Gross Annual Revenues.
The total amount of money collected by a business over the course of a year - usually a calendar year - is defined, for accounting purposes, as its gross annual sales, or gross annual revenues. For a company selling products, such as a distributorship or a retail store, the gross annual sales is likely to be all of the money it received for its products. For a service company, gross annual sales represent all funds collected from customers of the janitorial business, ad agency or other kind of service enterprise. And for auto dealerships with service bays, catering companies and some other firms providing both sales and service, gross annual sales refers to all receipts from both the sales and service parts of the business.
One important use of this term is as an indication of the size of a business. Obviously, a company that enjoys total revenues of $1 million per year is larger - probably employing more people and serving more customers - than the business that generates an average of $300,000 in revenues every year. And the gross annual sales figure is the first number in the equation used to calculate the earnings of a business, after all expenses have been deducted from the initial gross annual sales total.
One of the first facts the prospective buyer of a business for sale wants to know is the amount of gross annual sales for the past year and for the three or five years before. The answer can reveal the company's business trends. Understandably, most buyers will be more interested in a business that has recorded a steady increase in gross sales, year to year, because it suggests the business is expanding. This provides a contrast to the business that has posted a decline in gross annual revenues each year for the past few years, a sign that it is losing market share, or is conducting business in a market that is shrinking. Another question first asked by someone examining a business is the cost of those sales, including wholesale cost of products sold, employment expenses and all overhead costs such as rent, utilities, insurance and marketing.
As most prospective buyers know - or soon will learn as they investigate business for sale opportunities - when the total of all expenses incurred during the year is deducted from the gross annual sales figure, the remaining amount represents the earnings of the business. For many buyers, the earnings figure is just as important, or more so, than the gross annual sales.
