What Is the Times-Revenue Method?

The times-revenue method determines th🧸e maximum value of a company as a multiple of its revenue for a set period of time. The multiple varies by industry and other factors but is typically one or two. In some industries, the multiple might be less than one.

Understanding the Times-Revenue Method

The value of 🐻a business might be determined for various reasons, including to aid financial planning or in preparation for selling the business.

It can be challenging to calculate the value of a business, especially if the value is largely determined by p🐼otential future revenues. Several models can be used to determine the value, or a range of values, to facilitate business dec🦄isions.

The times-revenue method atte🐟mpts to value a business by valu𒉰ing its cash flow.

The times-revenue method is used to determine 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 𝔉year). A multiplier provides a range that can be used 𒁃as a starting point for negotiations.

The multiplier used in business valuation depends on the industry.

Small business valuation often involves finding the absolute lowest price someone would pay for the business, known as the "floor." This is often the 澳洲幸运5官方开奖结果体彩网:liquidation value of the business's assets. Then, a ceiling is set. This is the ma▨ximum amount that a buyer m๊ight pay, such as a multiple of current revenues.

Once the floor and ceiling have been calculated, the business owner can determine the value, or what someone may be willing to pay to acquire the business. The value of the multiple used for evaluating the company’s value using the times-revenue method is influenced by a꧋ number of factors including t🧔he macroeconomic environment and industry conditions.

Who Can Benefit From the Times-Revenue Method?

The times-revenue method is ideal for young companies with earnings that are volatile or non-existent. Also, companies that are poised to have a speedy growth stage, such as software-as-a-service firms, will base their valuations on the 𝔉times-revenue method.

The multiple used might be higher if the company or industry is poised for growth and expansion. Since these companies are expected to have a high growth phase with a high percentage of recurring revenue and good margins, they would be valued in the 🎶three- to 🌸four-times-revenue range.

The multiplier might be one if the business is slow-growing or doesn't show much growth potential. A company with a low percentage of recurring revenue or consistently low forecasted revenue, such as a service company, may be valued at 0.5 times revenue.

Criticism of the Times-Revenue Method

The times-revenue🍸 method is not always a reliable indicator of the value of a firm. This is because revenue does⭕ not mean profit. The times-revenue method fails to consider the expenses of a company or whether the company is producing positive net income.

Moreover, an increase in revenue does not necessarily translate into an increase in profits. A company may experience 10% year-over-year growth in revenue😼, yet the company may be experiencing 25% year-over-year growth in expenses.

Valuing a company only on its revenue stream fails to consider wh൲at it costs t♔o generate its revenue.

To get a more accurate picture of the current real value of a company, earnings must be factored in. Thus, the multiples of earnings, or 澳洲幸运5官方开奖结果体彩网:earnings multiplier, is preferred to the multiples☂ of revenue m♒ethod.

Example of Times-Revenue Method

In fiscal year 2021, X (formerly Twitter) reported annual revenue of $5.077 billion. Annual revenue for grew from 2020 to 2021 by over $1.3 billion. In 2022, Elon Musk announced his intention to acquire the company for $44 billion. This decision was later reversed and solidified via Securities and Exchange Commission filings.

The acquisition occurred at a company valuation of approximately 8.7 times-revenue. This means th✤at at an acquisition price of $44 billion, Musk paid 8.7 times the annual revenue of X ($5.1 billion).

The company's net annual loss for the same period demonstrates a glaring weakness of the times-revenue model. In 2021, it incurred an annual loss of $221 million, its second consecutive year of negative profit. Although the times-revenue valuation method indicates a value of 8.7, the m♒ethod fails to consider that the company was not a profitable company at the tꦇime.

As a postscript, X recorded $4.4 billion in revenue in 2022, an 11% decline. Its estimated loss for the year was $152 million. That number presumably reflects some of the severe cost-cutting initiated by Musk after his takeover but also could include some of the estimated cost of repaying the $13 billion in loans Musk took out in order to finance the purchase.

In April 2023, it ceased to exist as a separate corporate entity and was merged int X Corp., a wholly-owned subsidiary of X Holdings Corp., which is owned by Musk.

The Bottom Line

The times-revenue method of valuing a company has the virtue of being straightforward. It's revenue for a certain period multiplied by a set factor, usually one or two, to arrive at a figure that reflects the company's value.

It has a big drawback, though. Cash flow does not equal profits, and a valuatiᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚon based on the times-revenue method does not reflect the costs of doing busi💮ness.

There is another drawback that is sharওed by every method of valuation: All are, by necessity, based on past performance and none can accurately predict future sales.