Revenue is the start of the story, not the end
A buyer of a business is buying a future stream of profit and cash, together with the risk that the stream turns out smaller than expected. Turnover is where that stream starts, but a great deal happens between revenue and profit: the cost of goods or labour, rent, wages, the cost of replacing the owner's own work, and the capital the business needs to keep running.
That is why valuation methods focus on earnings or cash flows. The ATO's market valuation guidance describes the income approach as estimating value from the income or cash flows an asset can be expected to generate. ASIC's guidance on expert reports lists the methods generally considered, including discounted cash flow, earnings multiples applied to future maintainable earnings, and an orderly realisation of assets. A multiple of revenue is not on that list as a standalone method.
What a valuer actually looks at instead
Between turnover and value sit at least five questions.
Five questions stand between turnover and value
Margin
How much of each dollar is left after normal costs, including a market cost for the owner's work?
Reliability
Is revenue recurring, or won again each year?
Concentration
Does a large share come from a few customers?
Owner reliance
Would the revenue survive the owner leaving?
Capital needs
What must be spent on equipment, stock and working capital to keep it?
- Margin. How much of each dollar of revenue is left after all normal operating costs, including a market cost for the owner's work? See SDE and EBITDA for how owner remuneration changes the answer.
- Reliability. Is revenue recurring (contracts, subscriptions, repeat customers) or does it have to be won again each year?
- Concentration. Does a large share of revenue come from a few customers? Losing one can remove much of the profit. See customer concentration and business value.
- Owner reliance. Would the revenue survive the owner leaving, or is it tied to the owner's personal relationships or licence?
- Capital needs. How much does the business need to spend on equipment, stock and working capital to keep producing that revenue?
Two businesses can have the same turnover and opposite answers to every one of those questions.
Worked example
This example is hypothetical. The factor of 3 used below is an arbitrary number chosen only to show the arithmetic. It is not a market multiple and is not evidence of what any business is worth.
| Business A | Business B | |
|---|---|---|
| Revenue | $2,000,000 | $2,000,000 |
| Gross profit | $1,000,000 (50%) | $500,000 (25%) |
| Overheads, including a market cost for the owner's role | $600,000 | $400,000 |
| Normalised EBITDA | $400,000 | $100,000 |
| EBITDA margin | 20% | 5% |
| Largest customer, share of revenue | 8% | 45% |
| Revenue under ongoing contracts | 70% | 10% |
| Owner holds the key customer relationships | No | Yes |
Checking the arithmetic: $1,000,000 - $600,000 = $400,000, which is 20% of $2,000,000. $500,000 - $400,000 = $100,000, which is 5% of $2,000,000.
The same $2,000,000 of revenue leaves $400,000 of EBITDA in A and $100,000 in B
Business A
Revenue $2,000,000, EBITDA margin 20%
- Gross profit (50%)$1,000,000
- Overheads, including a market cost for the owner's role−$600,000
Normalised EBITDA$400,000
Business B
Revenue $2,000,000, EBITDA margin 5%
- Gross profit (25%)$500,000
- Overheads, including a market cost for the owner's role−$400,000
Normalised EBITDA$100,000
Step 1: earnings alone. Applying the same arbitrary factor of 3 to both gives $1,200,000 for A and $300,000 for B.
On earnings alone, A comes out at four times B, despite identical turnover.
At the same arbitrary factor of 3, A comes out at $1,200,000 and B at $300,000
- Business A ($400,000 × 3)$1,200,000
- Business B ($100,000 × 3)$300,000
Step 2: what that means as a share of revenue. $1,200,000 ÷ $2,000,000 = 0.60 times revenue for A. $300,000 ÷ $2,000,000 = 0.15 times revenue for B. No single revenue figure could describe both businesses.
Step 3: risk widens the gap. In practice the same factor would not apply to both. Business B's profit depends heavily on one customer and on the owner, and most of its revenue must be won again each year. A valuer would treat B's earnings as riskier, which lowers B's value further relative to A. On these facts, the gap in Step 1 is therefore likely to understate the real difference in value.
When revenue-based approaches are used, and their limits
Revenue does have a place in valuation, but a narrow one.
| Situation | Why revenue may be considered | The limit |
|---|---|---|
| Early-stage businesses with little or no profit yet | There may be no earnings to capitalise | Revenue says nothing about whether the business will ever be profitable; a forecast or other method is usually needed alongside it |
| Businesses with recurring client books, where evidence shows completed transactions in that field are priced by reference to recurring revenue | The buyer may already have the cost base to service the clients | Only valid against genuinely comparable transactions, and only when margins after integration are similar |
| As a cross-check on an earnings-based value | An implied revenue ratio that looks out of line can prompt questions | A cross-check, not a conclusion |
In every case the comparison works only between businesses with similar margins, cost structures, growth and risk. Applying a revenue ratio drawn from one type of business to another with a different margin can produce a badly wrong value. The Oliver Group article on revenue multiples vs profit multiples examines that misuse in detail.
Asking prices quoted as a share of turnover are a further step removed. An asking price is not a completed sale, and neither is a valuation opinion; see completed sales, asking prices and valuation opinions.
Limitations
- This page explains why turnover is not enough. It does not set out how a particular business should be valued, which depends on its purpose, facts and evidence.
- High turnover can still matter indirectly, through scale, diversification and resilience. Those effects come through in profit and risk.
- Some specialised sectors may have established transaction practices; whether they apply to a given business is a question for the valuer, supported by evidence.
Next steps
- Ask your accountant for normalised EBITDA, not just revenue, for the last three years.
- Work out what share of revenue comes from your largest five customers and how much is under contract.
- Note which customer relationships depend on you personally.
- Read how to value a small business for an overview of the methods that do rely on earnings.
Questions
My broker said businesses like mine sell for a percentage of turnover. Is that wrong?
It may describe how some listings are pitched, but it is not a valuation. Ask what profit margin and owner involvement sit behind that percentage, and whether your business matches. If it does not, the percentage does not transfer.
If revenue is growing fast, does that not make the business valuable?
Growth can add value, but only if it is expected to turn into profit and cash. Fast growth that needs heavy spending on staff, stock or marketing can consume cash for years. The valuation has to look at both.
Does a higher turnover help at all?
Scale can reduce risk, for example by spreading customers more widely, and it gives more room to absorb shocks. That benefit shows up through lower risk and more reliable profit, not through turnover as such.
Sources
- Market valuation for tax purposes, Australian Taxation Office. Describes the income approach as estimating value from the income or cash flows an asset can be expected to generate, and recommends a cross-check method where possible.
- Regulatory Guide 111: Content of expert reports, Australian Securities and Investments Commission. RG 111.86 lists methodologies generally considered (DCF, earnings multiples on future maintainable earnings, orderly realisation, quoted prices, genuine offers).
Cite or reuse this page
Valuo Insights team (2026). Why turnover alone does not tell you what a business is worth. Valuo. https://valuo.com.au/insights/why-turnover-alone-does-not-establish-value/ (updated 14 November 2026).
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General educational information, not financial, tax or legal advice. Worked examples are hypothetical and do not value a real business. A valuation depends on its purpose, the evidence and the agreed scope.