Definition
A revenue multiple is a price expressed as a number of times a business's annual revenue. It ignores costs entirely, so two businesses with the same revenue and very different profits show the same revenue multiple. It is most often quoted for software and other high-margin, growing businesses, and elsewhere it works best as a rough cross-check.
Worked example
Two fictional South African businesses each have revenue of R10,000,000 and are each listed at R6,000,000, a revenue multiple of 0.6.
- Karoo Office Supplies earns R1,000,000 of SDE, so its asking price is 6 times SDE.
- Fynbos Design Studio earns R3,000,000 of SDE, so its asking price is 2 times SDE.
The same revenue multiple hides a threefold difference in what you would pay for each rand of earnings.
Seller's discretionary earnings (SDE)
Seller's discretionary earnings is the yearly financial benefit a business gives one full-time working owner, before financing costs, non-cash charges and one-off spending.
The asking price is the price a seller or broker puts on a business when it is listed. It is an opening position, not a valuation, and what it includes varies from listing to listing.
Why buyers care
A seller may point to a revenue multiple when profit is thin, because it makes the price look modest. For most businesses you are buying the profit, not the sales, so value them on earnings and use revenue as a sense check.
Loupe's valuation tool calculates a revenue multiple for every business but uses it only as a sanity check. For businesses other than software, it flags an implied revenue multiple above 2.0 as unusual and worth questioning. Where SDE is zero or negative, the tool does not produce an earnings-based value and shows the revenue multiple only as context.