Applying the 3x revenue model to your business
The 3x sales model is a very easy-to-use method for company valuation. It is based on the assumption that the value of a company is three times its annual turnover. Here’s a quick guide on how to apply this model to your business.
Relevance of the method in certain industries
In technology-driven sectors, such as IT and for companies with above-average growth, sales can be a good indicator of company value.
Sales data for the 3x sales method
Make sure that sales data is correct and verified. Use audited financial statements whenever possible. You need the sales figures for the last three years.
Average annual turnover
Add up the sales for the last three years and divide the total by three to get the average annual sales.
Formula:
Average annual turnover = (sales year 1+sales year 2+sales year 3)/ 3
Example:
Average annual turnover = (500,000€ + 550,000€ + 600,000€)/ 3 = 550,000€
Calculate company value
Multiply the average annual sales by 3 to get the company value.
Example:
Average annual turnover: €550,000
Company value: €550,000 × 3 = €1,650,000
Compensate for fluctuations in sales
A temporary increase or decrease in sales distorts the average. In this case, consider sales over a longer period than three years or adjust for extraordinary events.
Increase plausibility: Consideration of additional evaluation factors
The 3x sales model neglects all aspects such as debt, assets or growth potential. We recommend using the 3x sales model as one of several valuation methods and additionally using at least one other method, such as the discounted cash flow method.
Suitable multiple for your industry
3x turnover is not equally suitable for every industry. Visit the NIMBO Multiples page to find out whether another multiple might be more suitable for your company.
Check and validate results
Verify the results of the assessment by comparing them with similar companies in your industry. Look for market reports or benchmark data to make sure your valuation is within a realistic range.
Weak points of the 3x turnover method
Neglecting profits: This method does not take into account the profitability of the company. Two companies with the same turnover but different profit margins would have the same value, which is unrealistic in practice.
Debt exclusion: The method ignores the company’s debt, which has a significant impact on the actual value.
Different industry multiples: Different industries have different valuation multiples. A flat multiplier of 3x turnover 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’s value.
What is it used for?
Valuation results can be used for strategic decisions, such as sales negotiations, investment decisions or internal planning.
What other rules of thumb are there?
Other common rules of thumb:
- 3x EBITDA = Company Value
- Consider how much profit a buyer could take out of the company in the next few years. Set the price so that the purchase price can be recouped within 4 to 7 years.
