Rule of 45

Rule of 45

Rule of 45
Shoot The Moon

 
 
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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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