Times-Revenue Method
What it is
The times-revenue method values a company by multiplying its revenue over a set period (commonly the prior 12 months) by a chosen multiple. It’s a simple, revenue-based shortcut for estimating company value, often used when earnings are volatile, nonexistent, or unreliable.
Key takeaways
- Value ≈ annual revenue × revenue multiple.
- Multiples vary by industry, growth prospects, and business model — often between 0.5 and 4+ in practice.
- Most useful for young, high-growth, or recurring-revenue businesses (e.g., many SaaS firms).
- Major limitation: it ignores costs, profitability, and future cash-flow dynamics.
How it works
- Select the revenue period (typically the last 12 months).
- Choose an appropriate multiple based on comparable transactions, industry norms, growth expectations, and risk.
- Multiply revenue by that multiple to produce a valuation range (you can also derive the multiple by dividing a purchase price by revenue).
The chosen multiple functions as a negotiation benchmark: lower multiples reflect lower growth or higher risk; higher multiples reflect stronger growth prospects, recurring revenue, and better margins.
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When to use it
- Startups and early-stage companies with little or no profit.
- Businesses with high recurring revenue where future revenue visibility matters more than current profitability.
- Quick, rough valuations or initial screening when detailed financials are unavailable.
Limitations
- Revenue is not the same as profit — the method ignores expenses and margins.
- Revenue growth may not translate into higher profits if costs rise faster than sales.
- Relies on historical revenue; it does not forecast future performance or account for operational efficiency.
- Multiples can vary widely by sector and transaction specifics, so results can be misleading if applied in isolation.
For a more complete valuation, combine revenue multiples with earnings-based approaches (EBITDA or net income multiples), discounted cash flow (DCF) models, or other metrics that reflect profitability and cash generation.
Calculation (simple formulas)
- Valuation = Annual revenue × Chosen multiple
- Multiple = Purchase price ÷ Annual revenue
You can use either direction depending on whether you start from a target price or a target multiple.
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Example
In 2021, X (formerly Twitter) reported about $5.08 billion in revenue. A reported $44 billion acquisition implied a revenue multiple of roughly 8.7× (44 ÷ 5.08). That high multiple illustrates the method’s limitation: X reported a net loss that year, so valuing the company solely on revenue ignored its unprofitable operations.
Short FAQs
-
What is a “good” times-revenue multiple?
There’s no universal “good” number. High-growth, recurring-revenue firms often command higher multiples (3×–4× or more); slow-growth or service businesses may trade below 1×. -
How is it used in negotiations?
Buyers and sellers use revenue multiples to set a benchmark price quickly; adjustments follow based on profitability, growth outlook, and risk. -
Is a low multiple bad?
Not necessarily—lower multiples can indicate a bargain or reflect real limitations (low growth, poor margins, higher risk).
Bottom line
The times-revenue method is a quick, easy way to estimate company value when earnings are unreliable or unavailable. It provides a useful starting point, especially for high-growth or recurring-revenue businesses, but should never be the sole basis for valuation because it ignores expenses, profitability, and future cash flows. Combine it with earnings-based measures and cash-flow analysis for a fuller, more reliable valuation.