Shoot the Moon with Revenue Rocket

The Rule of 45

Episode Summary

Here at Revenue Rocket we have implemented a corporate metric for identifying potential risk or exposure associated with inflated valuations resulting from rapid, unsustainable growth. The methodology is referred to as the Rule of 45. This episode will walk you through why this should be part of your M&A checklist.

Episode Notes

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.