Valuation Question - Would you be willing to pay a multiple based on revenue?

intermediary profile

September 17, 2024

by an intermediary in Miami, FL, USA

For a company doing $3M in revenue and year over year growth of 30-40% would you be willing to pay a multiplier based on revenue considering it's a tech-enabled service with proprietary software, or will it be solely based on EBITDA which isn't very much?

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commentor profile
Reply by a searcher
from University of Pennsylvania in Seattle, WA, USA
This company certainly could reasonably be valued on a revenue multiple but companies that operate in a multiple revenue world typically aren't great candidates for search. There are businesses that trade on revenue multiples (and can make a ton of money) but these will not be good fits for highly levered SBA deals, which is the typical transaction that gets discussed here. If you go down this path, just expect to bring a much much higher percent of equity to the purchase price.

In my search, I was looking at companies with less than $20m in revenue and eventually figured out that I was not able to buy a company with high growth rates. The prices tend to be higher for higher growth but also the track record is shorter. If a company has been growing at 40% for its life and is only at $3m in revenue, how long has it been in business? I personally thing the sweet spot is consistent 10% historical growth - enough history, repeatability, and growth to improve on.
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Reply by an investor
from Stanford University in Bellevue, WA, USA
In my mind, it doesn't matter if the multiple is based on revenue, net income, EBITDA or book value. Different industry have different valuation shortcuts - SAAS businesses as a multiple of revenue, manf may be a multiple of EBIT, etc. Determining what you are willing to pay for a business based on some sort of simplistic shortcut valuation metric is asking for trouble.

What really matters at the end of the day is what the future cash flows of the business look like compared to what you are paying.

I bought one business at 10x revenue yet it turned out to be a home run because we knew we could dramatically grow the business overnight and we did. I've paid < 2x EBITDA for another business and we were lucky to get our money back as the business declined dramatically and required additional investment.

Multiples are just a way to evaluate the purchase price not to determine the purchase price.
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