Can a business be valued on its revenue or turnover alone?

You can use revenue, also called turnover or sales, as one input to a valuation. The difficulty is that revenue says how much money came in, not how much the business kept. Two businesses with the same sales can earn very different amounts, so a price drawn from revenue alone tells you little until it is tested against earnings and other methods.

Where a revenue multiple fits

BDC describes market-based methods that calculate a valuation by applying a multiple, which may be based on EBITDA (earnings before interest, taxes, depreciation and amortization), revenue or other metrics. So a revenue multiple is a recognized tool. It is one choice among several, and BDC calls an EBITDA multiple the most common method used to determine a fair sale price for a business.

The multiple is not a fixed number

BDC says the specific figure used and the type of ratio vary depending on many factors, such as the industry and size of the company, market conditions and the multiples used to buy or sell comparable businesses. A figure quoted for one industry or one sale does not carry over to yours. Treat any rule of thumb you hear as a question to ask the valuator, not as an answer.

Why earnings still matter

BDC lists failing to normalize earnings, by adjusting for discretionary and non-recurring items and for non-market-rate revenues and expenses, as a common valuation mistake. Revenue includes none of those adjustments. BDC also says professional valuators typically use a mix of three methods to confirm a value, including asset values and what comparable businesses sold for. Compare the approaches in asset-based valuation.

What to do with your revenue figure

Use revenue to sense-check, not to set a price. Ask a Chartered Business Valuator which methods suit your business, and why. If you want the wider picture first, read how to value a business in Canada.