How many times revenue is a business worth? It depends. Many factors influence the answer to that question, including industry, current market trends, and the economic climate.
Although a number of valuation methods can (and should) be used to determine a company’s value, specifically answering the question, “How many times revenue is a business worth?” is a function of the Times Revenue method (sometimes called the Multiples of Revenue method).
What is the Times Revenue method?
The Times Revenue method is used to determine a range for a business’s current value based on its future profitability. That range of future profitability is calculated by assigning a revenue multiple to the business’s current revenue. The applicable revenue multiple varies widely depending on factors we mentioned earlier, including the specific industry, current market trends, and the economic climate.
How is the Revenue Multiple Determined?
The published Business Reference Guide contains a long list of metrics that, according to experts around the country, businesses should or do sell for. These industry metrics are largely responsible for determining a revenue multiple. (At Viking Mergers & Acquisitions, we source industry standards from this guide.)
Additionally, factors about the specific business can further influence the multiplier. For example, a slow-growing business that shows low potential, low forecasted revenue, and a low percentage of recurring revenue may be valued at one, or even less than one, times revenue.
On the other hand, a young business that is projecting high growth, shows good margins, and has a high percentage of recurring revenue may warrant a value of three or more times revenue. Note that none of this requires that company to have a vast amount of current earnings. The main influence on the calculated value in this method is the revenue multiple that will be used.
Revenue multiples are determined using a combination of the gross annual revenues and selling prices of a sample of comparable businesses in the industry. Values derived using the revenue multiple can then be used as a baseline figure in a more thorough valuation.
Revenue Multiples by Industry
A standard formula for calculating revenue multiples by industry is:
Selling Price / Annual Revenue = Revenue Multiple
Revenue Multiple by Industry Example
Below is a sample batch of companies, all in the same industry. We have used the above formula to calculate the revenue multiple of each company, and we will use the batch average to determine our revenue multiple for the industry.
|Company||Selling Price||Annual Revenue||Revenue Multiple|
The average revenue multiple in the above example is 3.6x, or in other words, the example industry’s revenue multiple is 3.6x.
Since the goal is to determine an average revenue multiple for the industry, the larger the sample of comparable businesses from which the above information is gathered, the more reliable the average multiple should be. This of course can present challenges for businesses that are highly niche, as the sample size of comparable businesses may be quite small.
Revenue Multiple in Action
Let’s use the Times Revenue method with our example industry revenue multiple. If we are trying to value a company in our example industry that has $5,000,000 in annual revenue, the calculation will look like this:
$5,000,000 x 3.6 = $18,000,000
Here, the Times Revenue method indicates a valuation of $18,000,000. However, it is critical to understand that values derived using the revenue multiple should be used as a baseline. As we mentioned earlier and will discuss further later, this number does not provide a complete picture of the business’s actual value.
Revenue Multiples by Sector (US)
The following chart shows a selection of revenue multiples calculated by NYU Stern School of Business using data from multiple data services. (Data is as of January 2021.)
|Industry||Number of Firms in Batch||Avg Revenue Multiple|
|Auto & Truck||19||2.71|
|Business & Consumer Services||169||2.51|
|Green & Renewable Energy||25||8.13|
|Healthcare Support Services||129||0.55|
|Investments & Asset Management||348||4.54|
|Metals & Mining||86||2.57|
For additional industry-specific insight and information, visit our page of Selling Tips & Business Valuation Multiples by Industry.
Challenges of the Times Revenue Method
It is important to acknowledge that revenue (even recurring revenue) does not necessarily translate to profit, and likewise, an increase in revenue does not automatically equate to an increase in profit. Thus, the main challenge in using the Times Revenue method is that it is not always a reliable value indicator.
Also, as we mentioned earlier, factors like margins, growth patterns, and recurring revenue are relevant indicators to a business’s value. How many times revenue a business is worth is just one data point to consider.
Regardless of the industry, no business valuation formula is perfect. To accurately determine a business’s worth, it is critical that more than one method be utilized; not just a single formula. With that in mind, at Viking Mergers & Acquisitions, our analysts take a weighted average of multiple methods and other pertinent value influences.
Request a custom valuation of your business for the most accurate picture of what your business would likely sell for, and how long it might take to complete the transaction.
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