Times Revenue Method

What is the 'Times Revenue Method'

The times revenue method is a valuation method used to determine the maximum value of a company. The times revenue method uses a multiple of current revenues to determine the "ceiling" or maximum value for a particular business. Depending on the industry and the local business and economic environment, the multiple might be one to two times the actual revenues. For example, assume corporation ABC's revenues over the past 12 months were $100,000. Under the times revenue method, one might value the company anywhere between $100,000 (one times revenue) and $200,000 (two times revenue).

BREAKING DOWN 'Times Revenue Method'

Small business owners might determine the value of the company to aid in financial planning or in preparation for selling the business. It can be challenging to calculate a particular business' value, particularly if the value is largely determined by potential future revenues. Several models can be used to determine the value, or a range of values, to facilitate business decisions.

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 year), and a multiplier provides a range that can be used as a starting point for negotiations. The multiplier used might be closer to one if the business is slow growing or doesn't show much growth potential. The multiple used might be higher, however, if the company or industry is poised for growth and expansion.

Small business valuation often involves finding the absolute lowest price someone would pay for the business (the "floor;" often the liquidation value of the business's assets) and then determining a "ceiling," or the maximum that someone might pay (such as a multiple of current revenues). Once the floor and ceiling have been figured, the business owner can determine the value, or what someone may be willing to pay to acquire the business.