What Multiple Of Revenue Is A Business Worth? – Raincatcher (2024)

The worth of any particular business is an open question. We can only get closer to understanding it by looking at income, making projections, and gauging what that business might sell for on the market.

WithNerdWalletreporting that 4.3 million new business applications were filed in 2020, and 32.5 million American small businesses in existence in 2021 according toOberlo, it’s inevitable: a select few businesses are going to rise to the top, in terms of value.

Should you ever choose to sell a business you own, you’ll want to make the most money possible from the sale. If you’re looking to buy a business, you might be interested in making sure you don’t overpay, if a company is not worth its asking price. That’s where a solid, accurate valuation comes in for buyers and sellers.

Revenue can be an important number to look at when it comes to business valuations, but there are many potential pitfalls. A professional broker can help you determine whether revenue (as opposed to other aspects of business income) is the best number to use when valuing a business.

The Revenue Multiple (times revenue) Method

Businesses are often valued using a “multiples approach,” where a dollar amount representing income is multiplied by certain whole numbers or fractions. A common multiples approach is known as the “times-revenue” method.

This method simply calls for multiplying the revenues of a business over a certain period of time (such as a year) by a specific number.

A venture that earns $1 million per year in revenue, for example, could have a multiple of 2 or 3 applied to it, resulting in a $2 or $3 million valuation. Another business might earn just $500,000 per year and earn a multiple of 0.5, yielding a valuation of $250,000. The multiples chosen are based on various factors unique to the business.

When using the times-revenue model, an analyst or broker may look at the business income numbers recorded in pro forma financial statements, which make projections within hypothetical scenarios, as the basis for the “revenue” part of the equation.

The times-revenue method is a good way to establish a “ceiling,” or the highest possible price in theory, that the business can attract at a sale. It is fast and easy to calculate, without having to incorporate all the nuances and variables that influence value.

The times-revenue approach may also be important for estimating the value of companies with unstable monthly profits, but a high earning potential regardless. Businesses like these include early-stage technology startups that heavily reinvest revenues into growth or companies in fast-growing industries where profit margins are expected to be very high.

A pitfall of the times-revenue method, however, is that it focuses on revenue alone. Big-picture revenue often fails to represent a business’s value accurately and can hide cash flow or debt-handling problems.

Generally speaking, this is the hierarchy of business income, from larger and less reflective of value to smaller and more reflective of value:

Revenue > Gross Profit > EBITDA (Earnings before interest, taxes, depreciation, and amortization) > Net Earnings

Revenue indicates how much money a business brings in through sales. However, if a large portion of that income is going into overhead, maintaining operations, or is being wasted or spent inefficiently, net earnings might be relatively low.

In that case, applying a multiple to top-line revenue can easily overvalue an unhealthy business.

Factors That Influence Multiples and List Price

The times-revenue method is a good way to establish a “ceiling,” or the highest possible price in theory, that the business can attract at a sale. It is fast and easy to calculate, without having to incorporate all the nuances and variables that influence value.

The times-revenue approach may also be important for estimating the value of companies with unstable monthly profits, but a high earning potential regardless. Businesses like these include early-stage technology startups that heavily reinvest revenues into growth or companies in fast-growing industries where profit margins are expected to be very high.

A pitfall of the times-revenue method, however, is that it focuses on revenue alone. Big-picture revenue often fails to represent a business’s value accurately and can hide cash flow or debt-handling problems.

Generally speaking, this is the hierarchy of business income, from larger and less reflective of value to smaller and more reflective of value:

Revenue > Gross Profit > EBITDA (Earnings before interest, taxes, depreciation, and amortization) > Net Earnings

Revenue indicates how much money a business brings in through sales. However, if a large portion of that income is going into overhead, maintaining operations, or is being wasted or spent inefficiently, net earnings might be relatively low.

In that case, applying a multiple to top-line revenue can easily overvalue an unhealthy business.

Different industries are affected by economic shifts, consumer behavior, availability of raw materials, and more. Some of these trends are temporary, while others might last for a long time, dragging down the performance of businesses across the board in that market.

Businesses in troubled industries, or where profit margins are squeezed by any number of factors, might fetch lower multiples. On the other hand, in industries that are poised for growth and show healthy leading indicators, sellers might be able to argue for higher multiples.

Recurring Revenue Potential

Businesses that use or intend to use arecurring revenuemodel, such as monthly or annual recurring revenue (MRR or ARR), may position themselves to increase in value over time as they grow their customer base.

The recurring revenue model, which subscription-based services and many SaaS (software as a service) businesses use, comes with a lot of potential upsides and less risk to investors. As a result, these businesses often receive somewhat higher valuations.

Independence From the Owner

When a sole proprietor must handle all sales, fulfillment, and decision-making in a business, it can be risky. If the owner ever experiences illness or hardship, or for whatever reason cannot handle the demands of running the business, everything can collapse.

For this reason, businesses with multiple senior leaders, or an owner who’s reasonably distanced from daily operations, represent less risk to investors and may be valued with higher multiples.

Operational Efficiency

Does the business manage costs well, and minimize them wherever possible? Does it keep the lights on while resolving debts and staying on a path towards consistent positive cash flow, month-over-month, and quarter-over-quarter?

The answers will reveal how efficient a company’s operations are. Buyers are willing to pay more for businesses that run smoothly as a result of managing money smartly.

What Valuation Multiples Mean for Business Buyers and Sellers

To buyers and investors, valuation multiples are essentially numbers that represent the level of risk.

A buyer might invest more in businesses that can maintain high revenues over time while adapting to shifts in the market. That may be reflected in higher multiples.

On the other hand, businesses that may not maintain the same amount of income going forward, whether it’s due to internal performance factors or external market conditions, are more likely to be valued at lower multiples.

By reducing the risk to potential buyers an owner can sell their business for a higher multiple of their revenues or earnings, whichever is most relevant. One way to do this is to lengthen the due diligence process and implement strong marketing and sales strategies.

Asking the Right Questions

To answer the original question — How many times revenue is a business worth? — a typical business is often worth less than a whole-number multiple of pure revenue. In some cases, it can be worth more.

A definitive answer is hard to determine since revenue is so non-specific. The times-revenue method leaves open the chance of either overvaluing or undervaluing a business, depending on profit margins and other factors. However, there may be no better way to value certain kinds of businesses.

For quickly growing startups in a pre-earnings stage, the times-revenue method might be the most viable way to appraise the venture, and thus get close to the actual value, even though it leaves out a lot of details.

However, two better questions might be:

“What multiple of net earnings is a business worth?” This takes a realistic look at profits and likely future earnings, instead of just revenue. Businesses with sales performance that demonstrably increases over time represent less risk for a buyer. As a result, such ventures have a better chance of selling for higher multiples.

“What factors unique to a business will influence the fair market value?” This narrows down the price even more based on all owned assets, such as a customer base, contracts, a brand presence, vendor relationships, and more. It also considers the health and stability of operations, and whether a business is on the right path for growth.

Work With A Broker

Figuring out all the above can be arduous, but an experienced broker can help. The experts at Raincatcher have many years of experience working with business owners and investors of all types and know how to evaluate a company’s worth beyond the numbers and formulas.

What Multiple Of Revenue Is A Business Worth? – Raincatcher (2024)

FAQs

What Multiple Of Revenue Is A Business Worth? – Raincatcher? ›

This method simply calls for multiplying the revenues of a business over a certain period of time (such as a year) by a specific number. A venture that earns $1 million per year in revenue, for example, could have a multiple of 2 or 3 applied to it, resulting in a $2 or $3 million valuation.

How much is a business worth revenue? ›

Use earnings multiples.

A more relevant measure is probably a multiple of the company's earnings, or the price-to-earnings (P/E) ratio. Estimate the earnings of the company for the next few years. If a typical P/E ratio is 15 and the projected earnings are $200,000 a year, the business would be worth $3 million.

Is a business worth 5 times profit? ›

Generally, a small business is worth 1-2 times its annual profit. However, this number can be higher or lower depending on the circ*mstances. If the business is in a high-growth industry, for example, it may be worth 3-5 times its annual profit.

How many times revenue is a startup worth? ›

Benchmark multiple

Startup valuation multiples: SaaS: usually 10x revenues, but it could be more depending on the growth, stage and gross margin. E-commerce: 2-3x revenues or 10-20x EBITDA. Marketplaces, hardware or low-margin businesses: 1-2x revenue.

How much is a business worth with $500,000 in sales? ›

Use Revenue or Earnings as Your Guide

For example, if the industry standard is "three times sales" and your revenue for last year was $500,000, your revenue-based valuation would be $1.5 million. Multiplying your earnings, or how much your business makes after subtracting its costs, is another valuation method.

What multiple of revenue is a company worth? ›

A venture that earns $1 million per year in revenue, for example, could have a multiple of 2 or 3 applied to it, resulting in a $2 or $3 million valuation. Another business might earn just $500,000 per year and earn a multiple of 0.5, yielding a valuation of $250,000.

How much is a $100 million revenue company worth? ›

However, a revenue of $100 million per year is a significant amount, and it suggests that the company has established a solid customer base and is generating significant income. Based on this information, it's possible that the company could have a valuation in the hundreds of millions of dollars, or even higher.

What is the rule of thumb for valuing a business? ›

A common rule of thumb is assigning a business value based on a multiple of its annual EBITDA (earnings before interest, taxes, depreciation, and amortization). The specific multiple used often ranges from 2 to 6 times EBITDA depending on the size, industry, profit margins, and growth prospects.

How many times earnings is a small business worth? ›

The industry of the business being valued can also have an effect on the choice of an appropriate multiple. SDE multiples usually range from 1.0x to 4.0x. The range of EBITDA multiples (for EBITDA between $1,000,000 and $10,000,000) is 3.3x to 8x, with the averages ranging from 4.5x to 6.5x.

How much is a business worth with $3 million in sales? ›

Main Street Deals (Sub $3m Revenue)

Companies with under $3m in sales will typically sell for 2.5 – 3.5 X their discretionary earnings (total cash the owner could take out of the company). Smaller companies that are even more owner-reliant will even be lower than that.

How much revenue is good for a small business? ›

In general, the average revenue is around $44,000 per year for a company with a single owner/employee. Two-thirds of these small businesses make less than $25,000 per year.

What is the rule of thumb for startup valuation? ›

“Valuation is really based on how much money the founders think they need,” says Pham. “Every round you're giving up 20 or 25 or up to 30%.” That rule of thumb, he says, helps guide every valuation negotiation.

How much is a business worth with 200k sales? ›

A business will likely sell for two to four times seller's discretionary earnings (SDE)range –the majority selling within the 2 to 3 range. In essence, if the annual cash flow is $200,000, the selling price will likely be between $400,000 and $600,000.

How much is a typical small business worth? ›

Factors affecting small business valuation

Thus, buyers have to approach the deal as if they are purchasing a job. Businesses where the owner is actively-involved typically sell for 2-3 times the annual earnings of the company. A business that earns $100,000 per year should sell for $200,000-$300,000.

What is the formula for valuing a business? ›

To accurately ascertain a business's value efficiently, calculate its total liabilities and subtract that figure from the sum of all assets—the resulting number is known as book value. This approach to calculating company worth takes into account both existing assets and any outstanding liabilities.

How much revenue is considered a business? ›

It defines small business by firm revenue (ranging from $1 million to over $40 million) and by employment (from 100 to over 1,500 employees). For example, according to the SBA definition, a roofing contractor is defined as a small business if it has annual revenues of $16.5 million or less.

How much is a business worth with $2 million in sales? ›

The Revenue Multiple Method

The revenue multiple used often falls between 0.5 to 5 times yearly revenue depending on the industry. For a company doing $2 million in gross annual sales, that could equate to a business valuation between $1 million (0.5X multiplier) up to $10 million (5X yearly sales).

What does $1 million in revenue mean? ›

The million-dollar mark is a tipping point at which the number of buyers interested in acquiring your business goes up dramatically. The more interested buyers you have, the better multiple of earnings you will command.

Top Articles
Latest Posts
Article information

Author: Dr. Pierre Goyette

Last Updated:

Views: 6393

Rating: 5 / 5 (70 voted)

Reviews: 85% of readers found this page helpful

Author information

Name: Dr. Pierre Goyette

Birthday: 1998-01-29

Address: Apt. 611 3357 Yong Plain, West Audra, IL 70053

Phone: +5819954278378

Job: Construction Director

Hobby: Embroidery, Creative writing, Shopping, Driving, Stand-up comedy, Coffee roasting, Scrapbooking

Introduction: My name is Dr. Pierre Goyette, I am a enchanting, powerful, jolly, rich, graceful, colorful, zany person who loves writing and wants to share my knowledge and understanding with you.