Why the Rule of 45 is a critical step in identifying a defendable valuation for acquisition targets:
- Understanding inflated growth risk
- Determining the risk through calculation.
- We look at two metrics to identify the combined value. First, is the Year over Year growth rate as a percentage and the second is EBITDA %.
- To calculate the growth percentage look at the gross revenue of a business over a couple year period. Subtract the previous year revenue from the following year revenue. Multiply that number by 100 and divide again by the second year revenue.
- Example: $3,200,000 (year 1) & $4,100,000 (year 2) 4,100,000 - 3,200,000 = 900,000 100 4,100,000 = 21.95%
- How to further evaluate targets with combined “Rule of 45” scores exceeding 45.
- Working with M&A advisors like Revenue Rocket helps identify valuation risks and other potentially costly errors that can come from improperly sizing up acquisition targets.
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