Business Valuation Revenue Multiplier: Pros and Cons

February 26, 2023 by

Andrew Rogerson in Business valuations, Selling your business

Is the revenue multiplier a reliable way to find a company’s value? Get both sides of the story in this article.

The business world is filled with decisions that can make or break a business’s success. Choosing the suitable business valuation method to determine a company’s value is one such decision. The revenue multiplier has emerged as an increasingly popular business valuation technique in recent years.

But how reliable is it?

We take a look at both the pros and cons of the business valuation gross revenue multiplier to help you decide if it is the right approach for your business.

Overview Of The Revenue Multiplier Method For Evaluating A Business

The business valuation gross revenue multiplier approach takes the company’s revenues and multiplies them by an industry-specific multiple, which gives you a proxy for business value.

Despite its potential, price-to-revenue multiples business valuation can be dangerous if not handled properly.

If you use it to evaluate the value of a company without caution, your result won’t reflect the cash flow of the business and be inaccurate. To ensure accuracy, consider that revenue multiples are only valid when expenses meet industry standards.

For example, let’s say a business has annual revenue of $10m, and the industry multiple on revenue is .7X. This would give you a business value of $7m based on the revenue multiplier valuation approach.

If we calculate the business value using Seller’s Discretionary Earnings (SDE), then we need to take into account the business’s profit margin and other operating costs such as taxes, depreciation, rent, etc.

For example:

If SDE is $1.5m and the business has a 12% profit margin, then business value = ($1.5m/0.12) x .7X = $8.75m.

This calculation illustrates the difference between business valuation based on revenue multiplier and business valuation based on SDE. However, each business is unique and both approaches should be considered when evaluating a business’s value.

In a nutshell, the business valuation revenue multiplier can be an effective tool to estimate business value in certain circumstances but it’s important to understand the limitations and pitfalls of this approach.

The business valuation revenue multiplier should be used with caution, ideally in combination with other business valuation methods such as SDE for accurate business value estimates. Utilizing multiple business valuation approaches can give you an understanding of what your business is worth and help you make informed decisions.

To get a better illustration of a real business valuation report, go to this link and view a sample valuation.

Let’s take a look at what exactly is meant by the term revenue multiplier…

Definition Of The Term “Revenue Multiplier”

A revenue multiplier is a business valuation approach used to calculate the business value by taking the company’s revenues and multiplying them by an industry-specific multiple. The multiple can be determined through research or gathered from comparable business transactions in a similar industry.

The revenue multiplier business valuation approach is based on the idea that similar companies should have similar business values.

The Perspective Of A Retiring Small Business Owner In California Looking To Sell Their Established Business

As a business owner, understanding business value is essential to selling your business. The revenue multiplier business valuation approach can be used to quickly estimate business value but it is important to make sure the multiple reflects current industry standards and that additional business valuation methods like SDE are also considered for accuracy.

Using both approaches together allows you as a business owner to get real business value and make informed decisions when it comes time to sell your business.

It is important to consult a professional evaluator to accurately value your business and to get the most from the sale.

In addition, business owners should be aware of the potential pitfalls and consider using other business valuation methods that the business appraiser can apply based on the business circumstances.

Consulting a business evaluator is the best way to get an accurate business value and make informed decisions when it comes time to sell your business.

Let’s now further analyze the advantages and disadvantages of utilizing the business valuation revenue multiplier approach when appraising a company. Shall we?

Pros of Using The Revenue Multiplier Method

The biggest advantage of revenue multipliers is that they are easy to calculate. All you need is the business’s revenues and an industry multiple, which can be easily found from business brokers or online databases. This makes it a great choice for business owners who want to quickly estimate business value.

Another advantage of revenue multipliers is that it provides business owners an indication of what other businesses in the same industry are selling for. This can be a great way to compare business values and ensure you’re getting the best deal when selling your business.

The Pros:

Quick and easy to use.
Helps business owners get an indication of business value.
Can be used to compare business values in the industry.
Allows the business owner to make more informed decisions on their sale price
Can provide owners with a realistic idea of what they can get out of their business sale
Flexibility in terms of being able to adjust the multiplier based on market conditions or other factors
Takes into consideration any additional assets that may be included in the sale, such as real estate, inventory, machinery, etc., increasing its accuracy as an estimate
Relatively precise for businesses in similar industries and regions
Easy to understand and use for anyone with basic knowledge about financial analysis and fundamental business principles

Cons of Using the Revenue Multiplier Method

The biggest disadvantage of using the business valuation revenue multiplier approach is that it may not be accurate due to its reliance on a single multiple. This means that if the business’s revenues are significantly different from other businesses in the industry, then its business value could be overestimated or underestimated.

Another potential issue with the business valuation revenue multiplier approach is that it doesn’t take into account other business factors such as business assets and liabilities, which can have a significant effect on business value.

The Cons:

May not be accurate due to its reliance on a single multiple
Doesn’t take into account business assets or liabilities
Only provides an estimate of business value and is not a substitute for a full business appraisal
Industry multiples can be difficult to find, depending on the business and industry
Can be affected by market conditions or other factors which may change business values over time
Potential inaccuracies due to reliance on historical financials rather than forward-looking projections or industry data
Dangers present if used incorrectly by failing to factor in recent sales trends or changes in economic conditions
Difficulties arise if there is no comparable data available from which to draw multipliers from
Limitations in terms of how accurate it can be at predicting future cash flows
This can lead to overvaluing during times of high demand or undervaluing when there is not sufficient data available
Does not take into account potential intangible assets (brand recognition, customer loyalty, intellectual property) which may affect the value
It may lead to confusion and misinterpretation if used without proper guidance from qualified experts

The business valuation revenue multiplier method can be a useful tool for business owners looking to quickly estimate their business value.

However, it should not be relied on as a substitute for a professional business appraisal and should only be used as an indication of business value.

As with any business valuation approach, it is important to consult qualified experts who can provide guidance and advice to ensure that business values are accurate and up-to-date.

Final Take

These examples demonstrate the risks of depending solely on revenue multiples to gauge a business’s worth.

Although these figures can offer an easy way to calculate range values for businesses, they should not be used as the only factor in determining their value, since small business owners are more focused on maximizing their earnings and ROI.

Impact on Retiring Small Business Owners Looking To Sell In California

Small business owners in California looking to cash out of their business should not rely solely on business valuation revenue multiples as an accurate way to estimate the business value.

Due to the many potential inaccuracies resulting from this method, business owners in California need to consult with qualified experts who can provide additional guidance and advice when it comes to business valuations.

Ultimately, business owners should be aware that when selling their business, the revenue multiplier method can provide a general indication of business value but should not be used as a substitute for reliable business valuation services and expert advice.

By taking the time to consult with qualified professionals, small business owners in California can ensure that they get the best value for their business when it is time to retire.

Are you a business owner in California looking to sell your business? Take the time to consult with qualified business valuation experts and get the most accurate estimate of your business’s worth. Don’t leave anything to chance – make sure you get the best value for your business. Contact us today and let us help you maximize your business’s potential.

Is Now a Good Time To Sell My Company?

The current economic climate in California is favorable for selling and exiting a company. If you’re considering selling your company, valuing it is a crucial first step.

The process of valuing a business can be challenging, but, you don’t need to struggle anymore. A business broker can help you navigate the process and sell your business by following five simple steps.

The first step is to understand how companies are valued. The most common method used to value a company is by using revenue multiples. Ebitda, or earnings before interest, taxes, depreciation, and amortization, is a measure of a company’s profitability. Companies usually have market gross revenue margins, so their gross revenue multiples are usually similar to the average market multiples and sometimes higher than other industries.
The second step is to understand what factors will affect the value of your company. The three most important factors are the size of the company, the profitability of the company, and the growth potential of the company.
The third step is to understand what buyers are looking for in a company. The most important factors that buyers look for are the size of the company, the profitability of the company, and the growth potential.
The fourth step is to find a buyer who is willing to pay your asking price. The best way to find a buyer is to hire a business broker.
The fifth and final step is to negotiate the sale price of your company.

Remember that for a smooth transition, it is beneficial to seek the guidance of a business broker. Valuing a business is not an exact science, but by following these steps, you can get the best possible price for your company.

The most important aspect is to use a method that is suitable for your unique situation. Keep in mind that valuations can be influenced by various factors, so it is crucial to be aware of all the factors that could affect the value of your company.

This is just a quick overview of how to value a company. If you’re interested in learning more, there are many resources available on our blog.

References:

Do you have any questions about how to value a company? Leave a comment below and we’ll be happy to help!

Final Take: Business Multiplier for Small Company

As a retiring baby boomer business owner in California, gaining knowledge on how the business multiplier valuation method works is important for a quick appraisal. By consulting an expert, and evaluating all your options, you can make the most informed decision when determining the value of your business and planning your retirement.

Contact Rogerson Business Services to help you with more information today!

With a business broker at your side, we feel confident that you will sell your business at the highest price.

If you are considering valuing and selling your company with yearly revenue between $500,000 to $1,500,000 within six to twelve months, give Andrew Rogerson a certified business broker based in Sacramento, California. Call Toll-Free at (844) 414-9700 or email him at support@rogersonbusinessservices.com covering the whole state of California.

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