Determining the worth of any business is never a simple, one-size-fits-all answer. At BlueExit, we know the key is to analyze income, make realistic projections, and evaluate what similar businesses sell for in the market.
With NerdWallet reporting 4.3 million new business applications in 2020 and Oberlo highlighting over 32.5 million small businesses in the U.S. in 2021, it’s clear that some businesses inevitably rise to the top in value.
Whether you’re considering selling your business or buying one, knowing the right valuation is critical. Sellers want to maximize proceeds, while buyers aim to avoid overpaying. A professional, accurate valuation bridges that gap.
The Revenue Multiple (Times-Revenue) Method
Many businesses are valued using a “multiples approach,” where income is multiplied by a number reflecting market trends, risk, and growth potential. One widely used method is the times-revenue approach, Revenue multiples are adjusted by specific factors to estimate value.
For instance, a business earning $1 million per year could have a multiple of 2 or 3, resulting in a $2–$3 million valuation. A smaller business making $500,000 per year might have a multiple of 0.5, resulting in a $250,000 valuation.
Revenue multiples are influenced by many factors unique to each business, including industry, growth trajectory, profitability, and market trends. Analysts often reference pro forma financial statements to make projections and determine the appropriate multiple. You can explore more about valuation approaches through our HVAC Business Valuation page.
Pros and Cons of the Times-Revenue Method
The times-revenue formula is fast and easy, establishing a theoretical ceiling for the sale price. It’s particularly helpful for businesses with variable monthly profits but high potential, such as early-stage tech ventures or fast-growing service companies.
However, relying on revenue alone has pitfalls. High revenue may mask low profitability or hidden debts. Generally, business income should be evaluated in this hierarchy:
Revenue > Gross Profit > EBITDA > Net Earnings
Revenue shows total sales, but if most funds go to overhead or operational inefficiencies, net earnings may be low. Applying a multiple to revenue alone can overvalue such a business.
Factors That Influence Revenue Multiples
Industry Standards: Different industries use different multiples based on historical sales, growth potential, and risk. For example:
- SaaS: 3x–5x revenue
- Retail: 0.5x–1.5x revenue
- Manufacturing: 1x–2x revenue
These benchmarks vary with market conditions, competition, and economic cycles. Explore industry-specific guidance on our HVAC Business Broker Services page.
Recurring Revenue: Businesses with recurring revenue streams, such as subscription services, often command higher multiples due to predictable cash flow.
Owner Dependence: Companies heavily reliant on a single owner face a higher risk, lowering potential multiples. Businesses with strong management teams or operational independence are valued more favorably.
Operational Efficiency: Buyers reward companies with streamlined operations, cost management, and consistent cash flow. The smoother the business runs, the more attractive it becomes to potential buyers.
Industry Trends and Market Influence
External factors, like economic shifts, customer behavior, and material availability, can affect revenue multiples. Businesses in struggling industries may see lower valuations, while those in growing sectors with strong indicators can command higher multiples.
What Valuation Multiples Mean for Buyers and Sellers
Multiples essentially measure risk and potential return for buyers. Companies with stable, predictable revenue and growth are seen as lower-risk investments and may fetch higher multiples. Conversely, businesses with uncertain revenue or declining trends are valued lower.
Sellers can increase multiples by reducing buyer risk through better documentation, clear operations, and strong marketing. Learn more about strategies for preparing your business for sale on our Sell Your HVAC Company page.
Asking the Right Questions
Instead of focusing solely on revenue, consider:
- What multiple of net earnings is my business worth?
This reflects profitability and projected earnings more accurately than revenue alone. - What unique factors affect my business’s fair market value?
Customer base, contracts, brand presence, vendor relationships, and operational health all play critical roles.
Frequently Asked Questions (FAQ)
1. What is a good revenue multiplier for my business?
A “good” multiplier depends on your industry, growth potential, profitability, and operational stability. Businesses with predictable cash flow, recurring revenue, and low owner dependency typically command higher multiples.
2. How much is a business worth that makes $1 million per year?
Using the times-revenue method, a business earning $1 million annually could be valued anywhere from $2 million to $3 million if the multiple is 2–3x. However, profitability, industry trends, and risk factors can raise or lower this value.
3. Should I use revenue or net earnings to value my business?
Revenue provides a quick estimate, but net earnings reflect profitability and operational health more accurately. Most professional brokers, like those at BlueExit, evaluate both to determine a realistic valuation.
4. How can I increase the number of buyers who might pay?
Reducing operational risk, documenting processes, maintaining recurring revenue, and building a strong management team all make a business more attractive. This lowers buyer risk and can lead to higher multiples.
5. Are industry trends important in valuation?
Yes. Economic conditions, competitive landscape, and market demand influence multiples. Businesses in growing industries with positive indicators are often valued higher than those in shrinking or volatile sectors.
Work With a Professional Broker
Evaluating all these variables can be challenging. At BlueExit, our experienced brokers guide business owners and buyers through every step, ensuring valuations are accurate and fair. We help identify risks, optimize business operations, and maximize the sale price beyond what formulas alone can provide. For a professional consultation, visit our Contact Us page and take the first step toward understanding your business’s true value.