what is the times revenue method 
the times revenue method determines the maximum value of a company as a multiple of its revenue for a set period of time the multiple varies by industry and other factors but is typically one or two in some industries the multiple might be less than one understanding the times revenue methodthe value of a business might be determined for various reasons including to aid financial planning or in preparation for selling the business it can be challenging to calculate the value of a business especially 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 attempts to value a business by valuing its cash flow 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 a multiplier provides a range that can be used as a starting point for negotiations the multiplier used in business valuation depends on the industry 1small business valuation often involves finding the absolute lowest price someone would pay for the business known as the floor this is often the liquidation value of the business s assets then a ceiling is set this is the maximum amount that a buyer might pay such as a multiple of current revenues once the floor and ceiling have been calculated the business owner can determine the value or what someone may be willing to pay to acquire the business the value of the multiple used for evaluating the company s value using the times revenue method is influenced by a number of factors including the macroeconomic environment and industry conditions the times revenue method is also referred to as the multiples of revenue method who can benefit from the times revenue method the times revenue method is ideal for young companies with earnings that are volatile or non existent also companies that are poised to have a speedy growth stage such as software as a service firms will base their valuations on the times revenue method the multiple used might be higher if the company or industry is poised for growth and expansion since these companies are expected to have a high growth phase with a high percentage of recurring revenue and good margins they would be valued in the three to four times revenue range the multiplier might be one if the business is slow growing or doesn t show much growth potential a company with a low percentage of recurring revenue or consistently low forecasted revenue such as a service company may be valued at 0 5 times revenue criticism of the times revenue methodthe times revenue method is not always a reliable indicator of the value of a firm this is because revenue does not mean profit the times revenue method fails to consider the expenses of a company or whether the company is producing positive net income moreover an increase in revenue does not necessarily translate into an increase in profits a company may experience 10 year over year growth in revenue yet the company may be experiencing 25 year over year growth in expenses valuing a company only on its revenue stream fails to consider what it costs to generate its revenue to get a more accurate picture of the current real value of a company earnings must be factored in thus the multiples of earnings or earnings multiplier is preferred to the multiples of revenue method the times revenue method can be calculated forward or backward you can divide the purchase price by annual revenue to arrive at the multiple or you can multiple annual revenues by a desired times revenue target to arrive at a potential target price example of times revenue methodin fiscal year 2021 x formerly twitter reported annual revenue of 5 077 billion annual revenue for grew from 2020 to 2021 by over 1 3 billion 2 in 2022 elon musk announced his intention to acquire the company for 44 billion 3 this decision was later reversed and solidified via securities and exchange commission filings 4the acquisition occurred at a company valuation of approximately 8 7 times revenue this means that at an acquisition price of 44 billion musk paid 8 7 times the annual revenue of x 5 1 billion the company s net annual loss for the same period demonstrates a glaring weakness of the times revenue model in 2021 it incurred an annual loss of 221 million its second consecutive year of negative profit 2 although the times revenue valuation method indicates a value of 8 7 the method fails to consider that the company was not a profitable company at the time as a postscript x recorded 4 4 billion in revenue in 2022 an 11 decline its estimated loss for the year was 152 million that number presumably reflects some of the severe cost cutting initiated by musk after his takeover but also could include some of the estimated cost of repaying the 13 billion in loans musk took out in order to finance the purchase 5in april 2023 it ceased to exist as a separate corporate entity and was merged int x corp a wholly owned subsidiary of x holdings corp which is owned by musk 6