We are growing thirty percent year over year and intentionally reinvesting cash back into growth, which suppresses our current EBITDA. How do we push prospective buyers to value our business on a revenue multiple rather than an earnings multiple?

Question

Tyler Smith · Accepted Answer

Most financial buyers in the lower middle market refuse to value companies on a revenue multiple. Private equity sponsors and senior bank lenders look strictly at adjusted EBITDA because their acquisition financing and investment returns depend on debt service capacity and actual cash flow.

However, if your company is growing rapidly and your bottom-line earnings are artificially depressed because you are aggressively investing in growth, you can justify a revenue-based valuation under specific conditions:
- Prove exceptional gross margins and unit economics. You cannot sell a low-margin business on a revenue multiple. If your gross margins exceed sixty to seventy percent, you can demonstrate that your core service delivery or product engine is wildly profitable. Show historical customer acquisition cost payback periods within twelve months and a lifetime-value-to-acquisition-cost ratio exceeding four to one.
- Present a normalized steady-state EBITDA bridge. Reframe your income statement to separate maintenance operational expenses from expansion capital investments. Show prospective acquirers exactly what your adjusted EBITDA margin would be if you stopped hiring future-facing sales personnel, capped experimental marketing spend, and operated the business purely for steady-state cash flow.
- Target strategic acquirers or specialized growth equity. Financial sponsors will almost always default to EBITDA. Strategic competitors and software-focused growth funds evaluate assets on total addressable market penetration and distribution synergies. They will pay a revenue multiple if acquiring your customer footprint accelerates their product timeline or eliminates an aggressive competitor.

If you cannot substantiate world-class gross margins and mathematically prove that your depressed earnings are the result of deliberate growth investment, do not attempt a revenue multiple defense. Focus your efforts on optimizing your adjusted EBITDA baseline instead.