Run-rate revenue

Run-rate revenue is the twelve-month extrapolation of a performance observed over a recent, shorter period. Monthly revenue of 500,000 units thus leads to a run-rate of six million over the year. The same logic applies to the ARR – Annual Recurring Revenue of subscription businesses, where the latest month's recurring revenue is annualised to reflect the level of activity reached rather than the historical cumulative figure.

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The run-rate is useful for valuing a fast-growing company whose past annual accounts understate the momentum under way. It provides a base closer to the real trajectory than the revenue of the closed financial year. This approach assumes, however, that the recent performance is representative and durable: it becomes misleading in the presence of marked seasonality, non-recurring revenue or an exceptional month.

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For example, a subscription company bills 250,000 CHF in its latest month: its run-rate recurring revenue comes to 3 MCHF, that is 250,000 multiplied by 12, against 2.1 MCHF actually collected over the closed year, marked by a gradual ramp-up.

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In practice, an appraiser always tests the run-rate against history and documented outlook before feeding it into a business valuation. Presented alone by a seller, it must be substantiated, since a savvy buyer will check the stability of the months retained before agreeing to derive a value from it.