The way to discover your business’s value and potential earnings can be an intricate process.
However, you don’t have to get yourself into trouble with the complexities of valuation.
Enter Times Revenue Method—it’s a simple valuation approach.
It might be challenging at first, but you’ll get a full understanding of it shortly after reading this article.
Let’s explore what exactly the Times Revenue method is.
What is Times Revenue Method?
The Times Revenue method provides you with the maximum potential value of your company, which is derived by multiplying its revenue over a specific period by a predetermined multiple.
Keep in mind that this multiple varies depending on factors like the industry you’re in and other pertinent considerations. Typically, you’ll find the multiple hovering around one or two. However, it’s worth noting that certain industries may have a multiple that falls below one.
Now, you might wonder, what’s this industry multiple? Well, it’s not a fixed number. It changes depending on the type of business you’re in and other contributing elements.
It usually hovers around one or two, but don’t be surprised if it’s less than one in some business sectors. Just remember, it’s all about the unique landscape of your specific industry.
In this approach, your business’s income over a certain duration becomes the key player.
You multiply this income by a specific number or the industry multiple, and you’ve got an estimate of your company’s maximum value.
Key Takeaways
- The Times Revenue method serves to determine the maximum value of a company.
- Its purpose is to generate a range of value for a business based on its previous period’s revenue.
- Times Revenue valuation varies across industries due to the varying growth potential in each sector, making comparisons between companies misleading.
- This method cannot be solely relied upon as an indicator of a firm’s value since revenue does not guarantee profitability, and increased revenue doesn’t always lead to increased profits.
- This method is easy to use, particularly when a company possesses reliable financial statements with accurate revenue totals.
Times Revenue Method Formula
To get a better understanding, the formula for getting the Times Revenue Method is pretty straightforward:
Company Value = Revenue of the Company × Industry Multiple
Here, the ‘Revenue of the Company’ usually refers to the earnings accumulated over the last year, often referred to as TTM or trailing twelve months.
The ‘Industry Multiple’ is a figure, shaped by industry standards, that can fluctuate based on the business sector and prevailing market conditions. Furthermore, you can also determine the level of your multiples by the level of SDE or EBITDA you have for your company.
More importantly, you should remember this formula offers a streamlined approach to estimating your business’s worth, but it’s not all-encompassing.
It doesn’t consider key aspects like profitability, market trends, and potential business risks.
Points to Consider
Through the Times Revenue Method, you can establish a value range for your company. This range is then calculated using your actual income during a specific time frame, like the last fiscal year. You’ll have a starting point to kick off negotiations if you happen to add a multiplier.
Keep in mind that the multiplier for valuing a business varies based on the industry as mentioned. As a small business owner, you’ll want to pinpoint the lowest possible price someone might pay, often referred to as the “floor.” This usually corresponds to your business’s liquidation value.
Consequently, you’ll want to determine a ceiling, which is the maximum amount a potential buyer might be willing to shell out, like a multiple of your current revenues.
After you have identified both the floor and the ceiling, you’re ready to figure out the actual value—essentially, what a buyer might be willing to shell out for your business.
The key here is the multiplier used in the times revenue method, which determines your company’s value.
But remember: this isn’t just a random number.
A variety of factors influence it, such as the broader economic climate and the specific conditions within your industry.
So, it’s essential to keep an eye on these factors as they might sway your business’s valuation.
Best Use Cases of Times Revenue Method
Considering different scenarios and growth potential, here are various applications of the Times Revenue method for business valuation:
1. Quick Assessment
- Basically figures out if a business is worth it or not
- Helps the buyer decide if they should warrant further due diligence
- Sets a starting point for other valuation methods
2. Industry Benchmarking
- Gives a rough idea of the company’s worth based on the competition
- Finds companies with similar revenue, growth, and business strategies
- Shows how the company measures up against its rivals
You can think of the Times Revenue Method as a tool to help set a baseline buying price for your business. If you have a specific selling price in mind, use the Times Revenue method to cross-check if your price is reasonable.
Just bear in mind that the times-revenue multiplier should align with what’s typical in your industry.
Times Revenue Method Limitations
Remember, it’s not always a foolproof way to gauge your business’s value.
Here’s why: revenue doesn’t necessarily mean profit.
The method overlooks your company’s expenses and doesn’t consider your company’s net income, which may be higher than the industry average.
However, if you think about it. A boost in revenue doesn’t automatically equate to a surge in profits. You might see a 10% year-on-year rise in revenue, but what if your expenses are growing at a rate of 25% year-on-year?
Placing your company’s value solely on its revenue stream ignores the cost of producing that revenue. To gain a more precise understanding of your company’s current worth, you need to bring earnings into the picture.
While this method provides a simplified approach to business valuation, it is essential to not overlook other factors for a more comprehensive evaluation of your business’s worth.
Bottom Line
The Times Revenue Method for assessing your company’s value has the advantage of simplicity. You take your revenue for a specific period, multiply it by a predetermined factor—usually one or two—and there you have a number representing your company’s worth.
But there’s a catch. Remember, cash flow isn’t the same as profit, and a valuation based on this method doesn’t take into account the costs involved in running your business.
Another universal downside across all valuation methods is worth noting. By their very nature, they rely on past performance, and none can precisely forecast future sales.
Get a Free Valuation
It’s not every day that you get to struggle with knowing the value of your business, but if you do, you don’t have to worry.
Our free Business Valuation tool uses a group of data inputs to assess risk and calculate a fair-market-value range for your business.
With this, you’ll get a great representation of your business’s current market value all in just a few clicks.
We, at Tsetserra Growth Partners, are eager to learn about the business you’ve proudly built. Tell us more about it!
