Times-Revenue Method

What Is the Times-Revenue Method?

The times-revenue method is a valuation method used to decide the maximum value of a company. The times-revenue method utilizes a various of current revenues to decide the "ceiling" (or maximum value) for a particular business. Contingent upon the industry and the local business and economic environment, the numerous may be one to two times the actual revenues. Notwithstanding, in certain industries, the various may be short of what one.

Understanding How the Times-Revenue Method Works

Small business owners could decide the value of the company to aid in financial planning or in preparation for selling the business. It very well may be challenging to calculate a business' value, especially in the event that the value not entirely settled by potential future revenues. Several models can be utilized to decide the value, or a range of values, to facilitate business choices.

The times-revenue method is utilized to decide a range of values for a business. The figure is based on actual revenues over a certain period of time (for example, the previous fiscal year), and a multiplier gives a range that can be utilized as a starting point for negotiations. In effect, the times-revenue method attempts to value a business by valuing its stream of sales cash flows.

Contingent upon the period for which the revenue is thought of or on the method of revenue measurement employed, the value of the various can vary. A few analysts utilize the revenue or sales recorded on proforma financial statements as actual sales or a forecast of what future sales will be. The multiplier utilized in business valuation relies upon the industry.

Small business valuation frequently includes finding the absolute lowest price somebody would pay for the business, known as the "floor," frequently the liquidation value of the business' assets, and then, at that point, deciding a ceiling that somebody could pay, for example, a numerous of current revenues. When the floor and ceiling have been calculated, the business owner can decide the value, or what somebody may pay to acquire the business. The value of the different utilized for evaluating the company's value utilizing the times-revenue method is impacted by a number of factors including the macroeconomic environment, industry conditions, and so on.

The times-revenue method is also alluded to as "multiples of revenue method."

Special Considerations

The times-revenue method is ideal for more youthful companies with earnings that are either non-existent or exceptionally volatile. Also, companies that are ready to have a quick growth stage, for example, software-as-a-service firms, will base their valuations on the times-revenue method.

The numerous utilized may be higher on the off chance that the company or industry is ready for growth and expansion. Since these companies are expected to have a high growth phase with a high percentage of recurring revenue and great margins, they would be valued in the three to four times revenue range.

Then again, the multiplier utilized may be more like one of the business is slow-developing or doesn't show a lot of growth potential. A company with a low percentage of recurring revenue or reliable low forecasted revenue, for example, a service company, may be valued at 0.5 times revenue.

Analysis of the Times-Revenue Method

The times-revenue method isn't always a reliable indicator of the value of a firm. This is because revenue doesn't mean profit. In like manner, an increase in revenue doesn't necessarily translate into an increase in profits. To get a more accurate image of the current real value of a company, earnings must be factored in. Accordingly, the multiples of earnings, or earnings multiplier, is preferred to the multiples of the revenue method.

Highlights

• The times-revenue (or multiples of revenue) method is a valuation method used to decide the maximum value of a company.
• This method isn't always a reliable indicator of the value of a firm as revenue doesn't mean profit and an increase in revenue doesn't always translate into an increase in profits.
• Producing a range of value for a business is meant.