Thinking about selling your business? Perhaps there’s a merger on the horizon, you’re seeking new sources of funding, or just engaging in some good, old-fashioned financial planning. Whatever the case, you’ll need to value your business.
Business valuation provides you with a ballpark value for the business in question. However, you’ll discover multiple valuation methods out there, and they all come with varying degrees of accuracy. One of the most commonly used options is a company valuation based on revenue.
The Times Revenue Method is widely used and addresses how to value a business based on revenue, rather than on other metrics.
It estimates a business’s worth by multiplying its revenue by a specific factor, called a “multiple,” and the multiple varies depending on the industry and other metrics. This method provides a quick snapshot of a business’s value, making it particularly popular with owners who need a straightforward, revenue-based valuation.
What Is the Times Revenue Method?
The Times Revenue Method is a flexible tool for company valuation based on revenue. It involves multiplying a company’s annual revenue by an industry-specific multiple. The result? An estimate of the business’s overall value.
For instance, if a business generates $2 million in revenue and the industry multiple is 1.5x, the estimated value would be:
1.5 x $2 million = $3 million
This formula helps simplify the process of calculating an approximate valuation. However, it is important to understand that the multiple you apply can vary depending on several different factors.
Business Valuation Based on Revenue: Key Factors That Influence the Multiplier
While the Times Revenue Method is a handy way to get a business valuation based on revenue, you need to know the factors that affect the outcome. These range from the industry in question to revenue stability, and everything in between. With a good understanding of these factors, you’ll have a more accurate valuation.
Industry
How many times revenue is a business worth? Different industries have different valuation multiples based on their growth prospects and risk levels. For example:
- Technology companies typically have higher multiples (for instance, 3x or more) because of their growth potential.
- Retail or manufacturing businesses may have lower multiples (usually 0.5x to 1.5x) because of slower growth and higher competition.
Understanding your industry’s trends is essential in determining the right multiple. Wondering how to value a business based on revenue with an accurate industry multiple? The experts at Axia Advisors can help.
Growth Potential
Companies with significant growth potential often command higher multiples. That’s because buyers are willing to pay more for businesses that they expect to generate higher revenues down the road. This is why startups and tech firms often have higher multiples, while mature companies may have lower ones.
Revenue Stability
A business with stable, ongoing revenue streams is usually less risky. In turn, that can mean a higher multiple. However, businesses with fluctuating revenue due to seasonality or market volatility (think travel or retail businesses) might be assigned a lower multiple to account for the additional risk.
Market Conditions
Overall economic and industry/niche conditions also play a significant role in determining your business’s multiplier. A booming economy or high demand for businesses in your industry usually raise multiples, while economic downturns generally lower them.
Calculating the Value Using the Times Revenue Method
Wondering how to value a business based on revenue? Just follow these simple steps:
1. Determine Your Annual Revenue
Start a company valuation based on revenue by calculating your company’s total income for the most recent year. Make sure the figures are accurate and up to date. This data will play a central role in determining your business’s value.
2. Research Industry Multiples
Next, find the average industry multiple for businesses like yours. Industry reports, M&A advisory firms like Axia Advisors, and business valuation tools can help you identify the appropriate multiple. For example:
- Software companies might see multiples of 3x to 5x.
- Construction or retail businesses may have multiples in the 0.5x to 2x range.
3. Apply the Multiple
Once you’ve identified the right multiple for your industry, multiply it by your annual revenue. The formula to get a company valuation based on revenue looks like this:
Business Value = Annual Revenue x Industry Multiple
For instance, if your construction company generates $5 million in revenue and the industry multiple is 1.2x, the business would be valued at:
$5 million x 1.2 = $6 million
This calculation provides a ballpark valuation based on revenue.
Advantages of the Times Revenue Method
The Times Revenue Method has several advantages over other options, particularly for small business owners and those looking for a quick estimate:
- Simplicity: It’s easy to calculate and understand, so it’s a popular choice for businesses that may not have the resources for complex valuation methods.
- Revenue Focused: Since it’s based on revenue, this method is beneficial for businesses with steady income streams, particularly those with strong top-line growth. For instance, if you’re selling a construction company or roofing company with an established reputation and strong local or regional presence, this could be the right valuation method.
- Widely Used: Many industries and buyers use revenue multiples to get a sense of value, so it’s a familiar metric in M&A (mergers and acquisitions) discussions.
Limitations of the Times Revenue Method
While this business valuation based on revenue method is straightforward, it does have its limitations. Some of the most important to understand include the following:
It Doesn’t Account for Profitability
The Times Revenue Method focuses solely on revenue, not profit. A business might generate significant revenue but have slim margins or high operating costs, making it less valuable. For example, a business with $1 million in revenue but barely breaking even may not be as valuable as one with $500,000 in revenue but strong profit margins.
It Ignores Operational Efficiency
This method does not consider the efficiency of operations or the management’s ability to drive growth. Two businesses with the same revenue could have vastly different operational efficiencies, making their actual value different despite similar revenue numbers. A business with low efficiencies and a management team that can’t respond to industry changes quickly would be worth less than one with an agile management team and high efficiencies, despite having similar revenue figures.
Market Fluctuations
Market conditions influence revenue multiples and can fluctuate. For example, multiples may be lower during economic downturns, which could undervalue a business. In this case, it might be best to wait to sell a business until the economy recovered somewhat.
Because of these limitations, it’s important to use the Times Revenue Method in combination with other valuation methods, such as profit-based valuations or asset-based valuations. This helps ensure a more comprehensive understanding of your business’s worth.
When to Use the Times Revenue Method
The Times Revenue Method is best used in specific situations. Some of the best times to use it include the following:
- High-revenue, low-expense businesses: Businesses with strong, steady revenue and low overhead costs may benefit most from this valuation method.
- Early-stage businesses: Fast-growing startups that haven’t yet turned a significant profit can use revenue-based valuations to attract investors.
- Service-based businesses: Companies that rely heavily on revenue, such as consulting firms or subscription-based businesses, often find this method effective.
Leverage Expert Guidance for an Accurate Valuation
While the Times Revenue Method provides a quick, easy way to estimate your business’s value, it may not give you the full picture. To ensure an accurate valuation, it’s important to consult with professionals who understand the roofing industry’s nuances. Axia Advisors offers personalized M&A advisory services to business owners wanting to understand how to sell a roofing business to private equity. We help you navigate the complexities of business valuation and ensure you receive maximum value.
For a more detailed and customized analysis, including tools like our business valuation calculator, contact Axia Advisors. Our team will work with you to assess your business based on revenue, profitability, growth potential, and more, ensuring a thorough and strategic valuation tailored to your needs.
Explore our M&A advisory services and use our business valuation calculator for more insights.
