Why revenue per employee matters

There are lots of reasons to look at revenue per employee (RPE). It is a good benchmark for evaluating the efficiency of firms that operate in the same sector. For example, RPE will be less in people-intensive sectors (e.g. Retail, Professional Services) than in capital-intensive sectors (mining, technology).

The arithmetic for deriving it is simple:

Revenue per Employee = Total Revenue (Sales) / Total number of employees.Yet, the arithmetic on its own merits doesn’t say anything about why RPE matters. This is why it matters:

all other things being equal, the higher the RPE for a firm the higher the valuation the market – and potential buyers for a privately held firm – will place on it.It’s a nice ratio that levels the playing field, and enables the efficiency of firms to be measured within a sector (apples to apples). The higher the RPE, the greater the likelihood of showing satisfactory profits. In technology and software firms, for example, $150,000 revenue per employee is a benchmark. The lower the RPE of a firm, the lower the price a buyer will be willing to pay (e.g. a RPE of $80K is especially bad in a place like Silicon Valley). The higher the RPE, the higher the price a buyer will likely pay (e.g. if the RPE is $500K, buyers will pay attention). Many factors determine the price a buyer will pay! Revenue per Employee is one quick benchmark that buyers use to qualify their interest.

So, if you own a privately held firm that you plan to sell to retire, then you’ll want to ensure that you have a high Revenue per Employee relative to others in the industry (that could theoretically be purchased).

What drives RPE?

While there are many factors, here are a five to consider:

1. Business sector – a company in a “hot” business sector will attract demand for its offerings, e.g. cloud, mobile enablement
2. A company’s competitive “moat” – its offerings are uniquely differentiated in the market, can command a high price and margin, and are difficult for competitors to match in the short term
3. Skilled employees – a cadre of functionally skilled, effective employees inevitably gets more home runs than the competition. Plus, they are hard to find to begin with.
4. Management – knowing how to attract and retain a productive team, and to coax efficiencies – and margin – out of work processes.
5. Marketing – having a great offering at a great price does nothing if it is not promoted effectively to the right markets in the right way.