A ratio used in business valuation to determine the business value in relation to its gross revenue or net sales.
What It Means
Revenue valuation multiple is a typical tool used to appraise businesses and professional practices based on market comparison to similar companies that have sold in the recent past.
You can calculate the revenue valuation multiples by dividing the sold companies’ selling prices by their revenue, usually measured over the most recent twelve months. If sufficient number of such business sale comps exists, you can develop a solid statistical evidence on which to base the valuation of your business.
Simply multiply the subject business revenues or net sales by the revenue valuation multiple. The result is the estimate of your business market value.
Revenue valuation multiples are typical in a number of appraisal situations:
- Young or growing companies that have not been optimized for profitability.
- Professional practices such as accounting firms, medical and dental offices.
- When selling a business to investors who plan to integrate its operations into a more efficient organization.
Revenue based business value estimation may be preferred to earnings multiple valuation whenever there is uncertainty or doubt regarding some of the company’s expenses.
Many business people tend to value a firm based on its sales because this number is the most direct indication of the company’s earning capacity.
This is especially the case if the investor perceives opportunities to improve the business financial performance through economies of scale or more cost effective business operations.