Our tech-enabled consulting firm is growing fast, but some buyers want to value us on a tight EBITDA multiple while others suggest a revenue multiple. How do we determine which valuation methodology best aligns with our cost structure and how do we present our financials to maximize our exit value?

Question

Tyler Smith · Accepted Answer

Determining whether your business should be valued on a multiple of EBITDA or a multiple of revenue depends on your scalability and cost structure. Service businesses are almost always valued on a multiple of EBITDA because their costs scale linearly with revenue. Software and high-leverage technology businesses are often valued on revenue multiples because their margins expand dramatically as they grow.

If your company is a tech-enabled services business, you fall into a gray area. Buyers will try to treat you as a standard service business to apply a lower EBITDA multiple. To command a premium revenue-based valuation, you must prove that your technology creates high gross margins and operating leverage.

We recommend using your weekly Scorecard to demonstrate how your customer delivery has become increasingly automated over time. Show them that your headcount does not need to grow at the same rate as your revenue.

If you can prove that your technology allows you to onboard new clients with minimal incremental cost, you can build a strong case for a revenue-based multiple. Otherwise, focus on maximizing your adjusted EBITDA by trimming low-margin services and tightening your operations to present a highly profitable, scalable engine.