A good revenue multiplier typically ranges from 1 to 3 times annual revenue for most small businesses. However, this can vary significantly based on industry, market conditions, and specific business characteristics.
What is a 5x revenue valuation? A 5x revenue valuation means that a company's market capitalization is five times its annual revenue. It indicates that investors are willing to pay five times the company's revenue for ownership of its shares.
Key Factors Influencing Revenue Multiples
Industry: Different industries have vastly different average revenue multiples. High-growth tech companies often see multiples of 5x or even higher, while more traditional industries like manufacturing might have multiples closer to 1x or 2x.
To find the fair market value, it is then necessary to divide that figure by the capitalization rate. Therefore, the income approach would reveal the following calculations. Projected sales are $500,000, and the capitalization rate is 25%, so the fair market value is $125,000.
So as an example, a company doing $2 million in real revenue (I'll explain below) should target a profit of 10 percent of that $2 million, owner's pay of 10 percent, taxes of 15 percent and operating expenses of 65 percent. Take a couple of seconds to study the chart.
Using this basic formula, a company doing $1 million a year, making around $200,000 EBITDA, is worth between $600,000 and $1 million. Some people make it even more basic, and moderate profits earn a value of one times revenue: A business doing $1 million is worth $1 million.
Main Street Deals (Sub $3m Revenue)
Companies with under $3m in sales will typically sell for 2.5 – 3.5 X their discretionary earnings (total cash the owner could take out of the company). Smaller companies that are even more owner-reliant will even be lower than that.
Weighted Rule for Public SaaS Companies
For the most part, companies with a higher weighted Rule of 40 are rewarded with higher revenue multiples. Public SaaS companies scoring greater than 40% on a Weighted Rule of 40 basis posted a median EV/Revenue multiple of 10.7x.
While $3 million in sales is certainly impressive, it doesn't automatically translate to a specific valuation. The true worth of your business depends on a complex interplay of factors, including: Profitability: Your net profit margin (after all expenses) is a critical driver of value.
The Revenue Multiple Method
The revenue multiple used often falls between 0.5 to 5 times yearly revenue depending on the industry. For a company doing $2 million in gross annual sales, that could equate to a business valuation between $1 million (0.5X multiplier) up to $10 million (5X yearly sales).
The valuation of a SaaS company with $10 million ARR depends on the applicable ARR Multiple. For example, if the company has a growth rate that justifies an ARR Multiple of 10x, the valuation would be approximately $100 million. If the multiple is 15x, the valuation would be $150 million.
Discretionary Earnings Rule of Thumb
The discretionary earnings method starts with the annual cash from the business that's available to the owner after taking out essential operating expenses. It then multiplies that number by a factor usually between two and four, depending on the business type.
What Is a Typical Revenue-Sharing Percentage? A revenue-sharing percentage ranges anywhere between 2% to 10%. This will depend on how many stakeholders are involved and the size of the company.
The Multiple Earnings method of how to value a business will typically provide a valuation of between five to eight times its annual post-tax profit, but there are many cases where external factors (e.g. the current economic climate, you company's reputation, the reason for the sale, and so on) can override the ...
The enterprise value-to-revenue (EV/R) looks at a companies revenue-generating ability, while the enterprise value-to-EBITDA (EV/EBITDA)—also known as the enterprise multiple—looks at a company's ability to generate operating cash flows.
3x to 5x – Startups in this category are middle of the pack. Investors consider these companies as a fair shot to success. More than 10x – This category is the 'A-list' as per investors. Startups displaying a 10x or more valuation have the highest chances of growth, profits, and expansion.
The rule of thumb for growth rate expectations at a successful SaaS company being managed for aggressive growth is 3, 3, 2, 2, 2: starting from a material baseline (e.g., over $1 million in annual recurring revenue [ARR]), the business needs to triple annual revenues for two consecutive years and then double them for ...
A good EBITDA growth rate varies by industry, but a 60% growth rate in most industries would be a good sign.
While breaking $1 million in revenue is an impressive milestone for a small business, it's important to remember that revenue alone isn't a reliable indicator of business success. Profitability, cash flow, and customer satisfaction are also critical factors that need to be considered.
A business will likely sell for two to four times seller's discretionary earnings (SDE)range –the majority selling within the 2 to 3 range. In essence, if the annual cash flow is $200,000, the selling price will likely be between $400,000 and $600,000.
In 2019, the median net worth of self-employed families was $380,000—over four times larger than the $90,000 in net worth held by the typical working family (Headd 2021).
A 2018 Payscale report found that small business owners median salary in the US is just above $59,000. Only 31 percent of business owners have a household income of $100,000 or more, whereas 35 percent have an income between $50,001 and $100,000.
Additionally, statistics show that the top 2% of the United States population has a net worth of about $2.4 million. On the other hand, the top 5% wealthiest Americans have a net worth of just over $1 million. Therefore, about 2% of the population possesses enough wealth to meet the current definition of being rich.
EBITDA and revenue are both valuable metrics used to calculate business performance. The primary difference between EBITDA and revenue is that EBITDA is a company's total income minus operating expenses. On the other hand, revenue is a company's total income before deducting any expenses.