A revenue multiple values a business as its revenue times a number, a net income multiple values it as its profit times a number, and a capitalization rate values it as its earnings divided by a percentage, and all three are the same small business valuation formula: an earnings or revenue figure and a factor the user supplies. Company value based on revenue is the method for a business whose earnings are not yet the point, a growing subscription company for instance; how to value a company based on profit is the method for one that is run for its earnings. This page works each on the hub's books at illustrative factors the user would enter, says when each is the right method, and points at the free small business valuation tool on this site that does the sum from your own figures, with no account, and publishes no multiple of any kind.
The revenue multiple valuation: revenue times the factor you enter
Value equals annual revenue times the revenue multiple you enter. On the worked books, $1,000,000 of revenue at an entered multiple of 0.5 is $500,000; at 0.75, $750,000; at 1.0, $1,000,000. Revenue valuation is used where the buyer is paying for the revenue's future rather than its present earnings, a subscription business with growth, a practice whose costs the buyer will run differently, and it is a blunt method for a business run for profit, because two companies with the same revenue and different margins read the same. The hub publishes no revenue multiple for any trade; the rule of thumb business valuation guide on this site says how to use one the owner was quoted without being ruled by it.
How to value a company based on profit: the net income multiple
Value equals earnings times the multiple you enter, where the earnings are net income, adjusted EBITDA or seller's discretionary earnings, and the multiple is of the same kind. On the hub's example, $180,000 of discretionary earnings at 2.5 is $450,000, $486,000 with $36,000 of inventory added at cost. A net income multiple applied to the reported net income of $120,000 is a different sum with a different customary multiple, and a small business valuation formula multiples rest on is only coherent when the earnings figure and the multiple match. The Financial Accounting Standards Board's standards govern how the net income the multiple starts from is reported.
Capitalization rate business valuation: the multiple's inverse
A capitalization rate values a business as its earnings divided by a rate: $180,000 of earnings at a cap rate of 40% is $450,000, exactly the 2.5 multiple by another route, because a cap rate is one divided by the multiple and a multiple is one divided by the cap rate. At a 33% cap rate the same earnings read $545,000, the 3.0 multiple; at 50%, $360,000, the 2.0. The method is the same arithmetic expressed as a return the buyer requires rather than a price the seller quotes, and it is useful because it makes the multiple's meaning explicit: a 2.5 multiple is a buyer asking for their money back in two and a half years of the earnings. The tool on this site takes either form and shows both.
How to value a small business based on revenue or on profit: which method, and the record
Use the revenue multiple when the buyer's model of the business ignores its current earnings, and the profit multiple when the earnings are what is being bought; when the two methods disagree by a wide margin, the disagreement is the negotiation and the owner should know which method the buyer will argue for. The International Business Brokers Association is where the profession's own transaction reporting lives. The free small business valuation tool on this site works the profit method with the inventory on its own line; the rule of thumb guide covers the revenue rules as the owner applies them; and the paid plan files each valuation against the business and the date with the method and the factor used, so the next conversation starts from the last one.
Questions people ask about revenue multiple
What is a revenue multiple valuation?
Annual revenue times the multiple you enter: $1,000,000 at 0.5 is $500,000. It suits a business bought for its revenue's future rather than its current profit; the hub publishes no multiple.
How do you value a company based on profit?
Earnings times a multiple of the same kind: $180,000 of discretionary earnings at 2.5 is $450,000, $486,000 with $36,000 of inventory. Net income, adjusted EBITDA and SDE each take their own customary multiple.
What is a capitalization rate in business valuation?
Earnings divided by a required return, which is the multiple's inverse: a 40% cap rate is a 2.5 multiple, so $180,000 of earnings reads $450,000 either way.