Does 3x Revenue Equal the Company Value?

Simply determine the company value by multiplying the revenue by 3?

For a few companies in certain industries, the rule of thumb of 3 x revenue = company value may make sense, but for most, it does not. It disregards many things and oversimplifies the reality of company valuation.

In principle, however, the multiplier method is a modern, sensible method based on industry comparisons. You can find a suitable multiplier for your industry and company size in the Nimbo market data.

Application of the X-Times-Revenue Model

The x-times-revenue model is a very easy-to-use method for company valuation. It is based on the assumption that the value of a company corresponds to a multiple of its annual revenue.

Example Calculation

Revenue: €500,000

Industry-typical multiple: 3

Company value (500,000 x 3): €1,500,000

Suitable Multiple for your Industry

Find out on the NIMBO multiples page which multiple is suitable for your company.

Weaknesses of the 3x Revenue Method

Neglect of profits: This method does not take into account the profitability of the company. Two companies with the same revenue but different profit margins would have the same value, which is unrealistic in practice.
Non-consideration of debts: The method ignores the company’s debt, which has a significant impact on the actual value.
Different industry multipliers: Different industries have different valuation multipliers. A flat multiplier of 3x revenue is therefore often not applicable.
No consideration of assets: The method does not take into account the company’s physical and intangible assets, such as real estate, patents or brand values.
Market conditions: Economic and industry-specific market conditions are not taken into account, which can lead to a distortion of the company value.

Increase Plausibility: Consideration of further Valuation Factors

The 3-times-revenue model neglects all aspects such as debts, assets or growth potential. We advise using the 3-times-revenue model as one of several valuation methods and additionally using at least one other method, such as the Discounted Cash Flow method.

Compensate for Revenue Fluctuations

A temporary increase or decrease in revenue leads to a distorted result. In this case, consider the average revenue of the last three years or adjust for extraordinary events.

What other Rules of Thumb are there?

See our separate blog entry on rules of thumb.