Back of the Envelope: How to Estimate the Annual Revenues of Any Private Company

by Ryan on September 15, 2010

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Have you ever wondered how much money a particular company makes? Perhaps you just wanted to know their annual sales?   The only problem was, the company was small (i.e. not publicly traded) so there’s no public financial information available on them.   So how do you calculate their revenues?

I created a simple, back of the envelope (i.e. quick and dirty), mathematical calculation that accurately estimates the revenue of pretty much any public / private company, large or small. It’s certainly possible that I’m not the first to come up with this calc, but for now, I’ll take the credit for it. Here’s how it works:

ANNUAL REVENUE = NUMBER OF EMPLOYEES X $100,000

That’s it!  It’s that simple.  Now let me briefly explain the logic behind this one.  The average American makes a little over $40,000 per year.  The costs of an employee to an employer is about 1.25x their base salary.  The additional 25% comes from payroll taxes, health insurance, worker’s comp insurance, office space for them to sit in, etc.  Therefore, the employer must bring in $50,000 ($40,000 x 1.25) for every employee in the company.  Because most companies have a gross profit of 50% or so, this means that in order to stay in business, the average company must have $100,000 in revenue for every employee in their company (($100k x 50%) – $50k) = $0 or Break Even).  The companies with more than $100k in sales per employee are more profitable (e.g. GOOG) than those that don’t (e.g. pretty much every startup company on the planet that takes VC / Angel money).

We so often hear about how well a company is doing based on their press releases, speaking engagements by their founders, etc.; however, no one ever wants to tell you exactly how much money their company makes. The next time you want to know how much revenue someone’s company is doing, don’t just ask them point blank. Instead, simply ask them how many employees they have. Every CEO will tell you how many employees they have. If they won’t tell you, just ask one of their employees how many people work in the company.  Once you have that number, simply multiply it by $100k, and you now have a quick and dirty (and in my experience, highly accurate) estimate of their annual sales.

A word of caution on startups…If the company is a startup, you can pretty much rest assured that they are doing way less than $100k per employee.  For now, assuming the company has a business model where they actually sell something), take their number of employees and multiply by $50k instead of $100k to arrive at the annual revenue estimate.  In a later post, I’ll explain how you can more accurately nail down the exact revenues of a cash burning startup. In addition, I plan to explain how to accurately estimate a startup’s market cap (i.e. how much the company is worth) in a calculation just as simple as the one you’ve read about here today.

UPDATE: I’ve been reading in the comments about how the calc needs to be adjusted upwards / downwards depending on the industry (Duh!  It’s a “back of the envelope” ESTIMATE, hence the title of this post!).  Therefore, I’ve come up with a simple adjustment such that it works for nearly any industry.  The revised formula is  as follows:

ANNUAL REVENUE = NUMBER OF EMPLOYEES X AVERAGE SALARY OF AN EMPLOYEE IN YOUR INDUSTRY X 2.5

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  • Michael

    Great article. So if a company makes over $250K, we can assume that they have at least 2 employees. These companies are categorized as rich and will be hit with a huge tax increase next year. So the formula will still work but it will need to be adjusted to
    $40,000 x 1.30 1.35 1.50

  • http://www.ryanborn.net ryanborn

    Hey Michael – is the tax increase for $250k in revenues or net income? If it's $250k in revenues that's way way way too low. Let me know.

  • Brad

    Great article. I find it to be on track via the hotel business.

  • http://gabgoldenberg.com Gab Goldenberg

    The big idea is clever… but the implementation is too raw.

    I think this only makes sense if you particularize by industry. E.g. Take Inc 500 numbers and adjust accordingly.

    Also, it assumes you can figure out how many employees the company has.

  • http://www.ryanborn.net ryanborn

    Thanks for the comment and tweet Gab! It actually works pretty well for any company . There is of course a certain margin of error. Try it on any public company and you'll see that it's pretty accurate. Pick a public company, look up the # of employees, multiply by $100k and then, only after you have that calc completed, check their latest 10-K and you'll see their annual revenues are close to this amount. The calc works pretty well for estimating small private company revenues. Finding the number of employees is easy – just ask CEO, any exec, or anyone that works at a private company. Finding # of employees for public company is super easy – it's listed on Yahoo Finance as well as in their 10-k.

  • http://www.ryanborn.net ryanborn

    thanks Brad! Glad to hear it works!

  • http://www.techexplorer.in Jal

    Awesome estimation theory Ryan. I would just like to say that the number of employees * 100,000 should be called the minimum revenue needed for stable sustenance.

  • http://www.ryanborn.net ryanborn

    Thanks Jal! great point!

  • barmstrong

    Clever and sounds dead on in my experience (discounting outliers as you mentioned) – thanks for sharing it!

  • http://www.ryanborn.net ryanborn

    thanks for the comment Brian! glad to here it works in your experience as well.

  • Dave

    I'm not sure where you're getting your numbers from.. Fortune 500 companies regularly get up to $1mil per employee and some fast growing companies on the Inc 500 have had up to $3mil per employee.

    GE – around $500k
    AT&T – $400ish
    Proctor & Gamble – $625k

    Those numbers are all up in the air, however, since it doesn't take into account part-time, contract and temp workers.

  • http://www.ryanborn.net ryanborn

    Hey Dave – thanks so much for the comment – you are correct with your examples of big public companies. The post was about: 1. private companies and 2. it's a “back of the envelope” calc. I tried to point out the some well run public companies will do much better than $100k in rev per EE.

  • Scott

    I

  • Scott

    I use a similar metric. For software firms I usually tend a bit higher per employer. This is assuming they are selling a product for money. If they are not selling a product for money I assume they have no income for the most part unless it is something obvious like ad revenue and that's pretty easy to nail accurately by looking at revenue sharing statistics and page views through the site ranking.

    There are also quite a few companies with a small number of people and absolutely enormous revenue which is used by the founder as he sees fit. I've got about a dozen employees and mid 8 figures for example. I suppose that is an outlier, but it can be figured out pretty easily by looking at how much my products are and what my market penetration is in my segment, and then multiplying by the known size of the total market. No one ever does that though, they just talk about these small numbers and that's fine with me.

  • http://www.jeromepineau.com/ JeromePineau

    Probably quite accurate. Guy Kawasaki has a similar shpiel on premoney evaluations of startups: 500K per employee then subtract 250K per MBA :) In my experience, that one is pretty on the ball as well! :)
    Thanks for a great post.
    J.

  • http://www.johnexleyonline.com JohnExley

    Ryan, really nice post. Succinct and understandable for a guy who struggles with finance (despite enjoying math/calculus…finance has yet to click with me fully)!

    Good work and will be cool to read the tips going forward. Meeting up sometime in the near future is imperative man!

  • gubatron

    LOL

  • Venkata Majeti

    Dear Ryan Born:

    You are right, you are not the first to think of or come up with a simple calculation on Revenue Estimates of a public, private company. Do not take credit for anything. However, I would applaud you and give special recognition for bringing a useful topic to BLOGs for discussion and to the benefit of many new entrepreneurs.

    The calculation, approximately $100k/head, has been a simple rule of thumb among IT consultants since the early '80s; a $10 million dollar annual revenue estimate for a 100-person company – which generally yields 10-20% profit depending on how competitive the employee landscape is to the owners. In other words, more available employees and competition for work makes consultant owners richer. Our great nation was full of young entrepreneurs that manage between 20 and 100 people, making a decent living as independent business owners.

    This formula, however, does not apply to non-IT jobs – even if they are in the Engineering field. For example, Civil Engineering, Mechanical Engineering, Chemical Engineering and other fields have had historically “LOWER” salaries. Also, certain fields – such as Lawyers, Accountants, Doctors and other health professionals, even Administrative Staff but at an executive level – all supply their services on an “hourly” billing basis and make more money than technical people. A CEO managing one hundred doctors as part of their medical practice will see MANY times more revenues and profits; I've had the good fortune of knowing a few of those CEOs as is also the case with knowing some IT entrepreneur CEOs.

    In Telecommunications Equipment, where huge capital is needed upfront to create value to its customers, steady state revenue estimates are to be between $1.5 and $2.0 million per head in order to survive as a good business and our formula would ensure that everyone would fail. While “software only” companies are expected to have at least 60 percent or more profit margin to survive in the long run, hardware-only companies are considered healthy at 40% or higher profit margins (pre tax and operating expense deductions, of course).

    I sincerely hope you find this a starting point for further investigation, not as a lecture from an unsolicited headache. Thank you and Best Wishes.

    Venkata Majeti

  • http://www.ryanborn.net ryanborn

    Thanks for the comments Scott! Like you said, it all depends on the industry and how much you think the avg EE makes at the company, what their gross margins are, if they have taken financing, and then backing into a revenue estimate from there. Glad to see you are doing in the 8 figures. Impressive!

  • http://www.ryanborn.net ryanborn

    LOL! Thanks so much Jerome.

  • http://www.ryanborn.net ryanborn

    Thanks John! I love to dumb down accounting and finance because it's really not as complicated in the real world as the books / professors make it seem while in school. I hope to see you in LA or at a conference one of these days. I have to miss TC disrupt later this month but hope to make it to the next one.

  • http://www.ryanborn.net ryanborn

    Thanks so much Venkata. I figured that I couldn't have been the first to come up with this calc and it feels pretty good to know that it's actually been used in the real world. The details you provide by industry are very helpful. The calc I wrote about is of course an estimate and a quick and dirty / back of the envelope one at that. Accuracy of course depends on making adjustments for context as you have so well pointed out. Thanks again for the input.

  • Venkata Majeti

    Dear Ryan:

    Thank You. Your BLOG is a great starting point for new entrepreneurs to learn about their business. Hope to see you continue the rest of your post, conversations about revenue-to-market cap multiples, valuation estimates, salary to admin-overhead multiples, differences between product and service companies, etc. Also write why you think GOOG is so profitable. All in fun. Thank you.

  • Michael

    Yes, it is way too low. The tax increase is on adjusted gross income and the allowable deductions have been reduced. The effective tax hike will be from 35% to 40.8% (not 39.6% as officially stated).

    For each $250K x 5.8% = $14,500 in additional taxes. The average American worker makes $40,000. This is one job for for every 750K in gross adjusted income under this tax. You add up all the small businesses that this new tax will affect and it adds up to alot of jobs. We've seen how will the government creates jobs under the stimulus. Isn't it better that small business keep as much money as possible to ensure a healthy, vibrant economy.

    http://online.wsj.com/article/SB10001424052748703959704575454061524326290.html

    Tax Impact on revenue:

    “Revenue has a marginal effect on your bottom line – expenses has a DIRECT effect on your bottom line – in other words let's say your business makes 25% margins, so a reduction of $10,000 a month in revenue has a detrimental effect of $2,500 to your bottom line. However a tax increase of say $10,000 – is like taking a revenue hit of over FOUR TIMES THAT AMOUNT.”

    “The current tax code taxes capital heavily. It taxes capital through the capital gains tax and taxes on dividends, both at 15 percent, and through taxes on business income and the corporate income tax—especially because businesses cannot deduct the full cost of the capital they buy, but must depreciate it over several years at a lower real value.

    Under current law, the tax rate on capital gains will increase to 20 percent and that on dividends will increase to up to 39.6 percent on January 1, 2011. Congress should at the very least hold these rates at 15 percent. To lower the cost of capital for small businesses further, Congress should consider lowering the rate on capital gains and dividends below 15 percent and make permanent President Obama’s plan to provide immediate small business expensing of all capital purchases.”

    “Under current law, businesses are required to issue 1099s in a limited set of situations, such as when paying outside consultants. The health care bill includes a vast expansion in this information reporting requirement. Businesses will now have to issue 1099s whenever they do more than $600 of business with another entity.”

    http://www.heritage.org/Research/Testimony/Small-Businesses-Face-Steep-Tax-Hikes-Unless-Congress-Acts-Soon

  • Michael

    $2 Million per stimulus job? LA county controller said that of the $111 million stimulus money spent for jobs only 55 were created. This government is out of control. Let's use Ryan's formula.

    To put this in perspective a start-up business can afford to hire a new employee for every $100,000 in revenue (This is assuming $40K avg. salary).

    ANNUAL REVENUE = NUMBER OF EMPLOYEES X $100,000

    That's 20 employees per $2 million dollars if the money had been put in the hands of entrepreneurs.

    Wouldn't that be a great venture capital fund? But instead, the money goes to the bureaucrats.

  • JohnExley

    Accounting was super hard for me my sophomore year, I got a 64% on my first exam, then an 80%, and then hustled like mad the last 4 weeks and did well enough to earn an A haha, let's just say it would have been sick if you were my prof at the time.

    We will definitely meet up sometime soon. The Next TC Disrupt perhaps, as we are both unable to make this one. Hope your projects are growing like wildfire my man. Catch you really soon.

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