May 31, 2022
Calculating Forward Multiples
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
Valuations for software companies with recurring revenue are calculated using forward revenue multiples.
While revenue is the primary factor in calculating the multiple, some companies can increase it by demonstrating excellence in other areas.
Use these definitions to calculate it:
Revenue growth – revenue this year over last year in a percentage.
Sales efficiency -- take your increase in gross profit and divide by last year's sales and marketing expenses.
Cash flow margins -- divide your cash flow by revenues.
Net income margin -- divide net income by revenue.
Gross margin -- divide gross margin by revenue.
To calculate forward multiples for companies going public, use the following formula:
Forward Multiple = 6.3 + 38 x Revenue_Growth + 2 x Sales Efficiency.
Revenue growth and sales efficiency provide the most impact.
If you have additional value
through your margins, you can add them in as well.
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