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Run rate

A run rate annualises a recent short period, such as last month's revenue multiplied by twelve. It shows current pace, not what the business actually earned over a year.

Also called run-rate

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Definition

A run rate turns a short recent period into an annual figure, for example one month's revenue multiplied by twelve or one quarter's multiplied by four. It describes the pace a business is running at now rather than what it achieved over a full year. It is a projection, not a result, and it assumes the recent period will repeat.

Worked example

Lanternfish Analytics is a fictional Canadian software business. In its best month ever it billed C$50,000, and its listing quotes a "C$600,000 revenue run rate".

  • Revenue over the trailing twelve months was C$450,000.
  • The last three months averaged C$40,000, which annualises to C$480,000.

The C$600,000 figure describes one strong month. The full year and the latest quarter both tell a more modest story.

Trailing twelve months (TTM)

Trailing twelve months means the most recent 12 consecutive months of figures, whatever the financial year. It gives a more current view than the last set of annual accounts.

Why buyers care

Sellers tend to quote a run rate when recent months look better than the year as a whole. That can be fair for a subscription business growing steadily with low churn. It can mislead where sales are seasonal, where a large one-off order landed in the chosen month, or where a price rise or discount has not yet settled.

Ask which period the run rate uses and why it was chosen. Then ask for monthly revenue for the last two years and compare the run rate with the trailing twelve months figure. Loupe's valuation tool asks for revenue over the last 12 months rather than a run rate. For SaaS businesses it values annual recurring revenue, which is itself a run rate of current subscriptions, so it also adjusts for churn, growth and net revenue retention and cross-checks the result against SDE.

Churn

Churn is the rate at which a business loses customers or recurring revenue over a period. Customer churn and revenue churn can tell very different stories.

Annual recurring revenue (ARR)

Annual recurring revenue is the yearly value of subscription or contracted revenue expected to repeat, measured at a point in time. Software businesses are often priced as a multiple of it.

Related terms

  • Trailing twelve months (TTM)

    Trailing twelve months means the most recent 12 consecutive months of figures, whatever the financial year. It gives a more current view than the last set of annual accounts.

  • Annual recurring revenue (ARR)

    Annual recurring revenue is the yearly value of subscription or contracted revenue expected to repeat, measured at a point in time. Software businesses are often priced as a multiple of it.

  • Monthly recurring revenue (MRR)

    Monthly recurring revenue is the subscription revenue a business expects to bill in a normal month. Its monthly movements show where growth comes from and where it leaks away.

  • Churn

    Churn is the rate at which a business loses customers or recurring revenue over a period. Customer churn and revenue churn can tell very different stories.

  • Normalised earnings

    Normalised earnings are profits restated to show what a business would earn in a typical year under a new owner, after removing one-off items and correcting costs that are not at market rates.

Guides

  • How to read a business-for-sale listing

    A listing is a sales document written to win enquiries. This guide shows how to read its numbers, its wording and its gaps, and how to turn them into questions before you sign an NDA.

    10 minutes to read

  • Buying an online business: SaaS, ecommerce and content compared

    SaaS, ecommerce and content businesses are sold on the same marketplaces, but they earn money differently, fail differently and are valued differently. This guide compares the metrics, risks and diligence for each.

    9 minutes to read

  • How small businesses are valued

    Most small businesses are valued as a multiple of their earnings. This guide explains how the earnings basis is chosen, why size and quality move the multiple, and why an asking price is not a sale price.

    11 minutes to read

Red flags

  • One-off revenue inside the last 12 months

    A contract, windfall or spike that will not repeat can sit inside the last 12 months and be priced as if it will. Take it out before you value the business.

    Severity: price it inFinancials

  • Heavy discounting to hit targets

    Revenue bought with deep discounts, cut-price prepaid deals or stock pushed onto resellers flatters the final year before a sale and is unlikely to last.

    Severity: price it inCustomers and revenue

  • Figures that change between the teaser and later documents

    Revenue, profit or add-backs in the teaser or listing do not match the information memorandum, the management accounts or the tax returns. Some changes have a simple explanation; others mean the first figures were never real.

    Severity: price it inSeller and process

Free tools

  • See a low, likely and high value from the figures you have, and whether the asking price holds up.

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