Our business has high gross margins but high upfront development costs due to our custom digital integrations. Should we push for a valuation based on a multiple of our revenue or a multiple of our adjusted EBITDA to get the highest valuation?

Question

Tyler Smith · Accepted Answer

Choosing the right valuation methodology depends on your growth rate, your capital efficiency, and your target buyer. A revenue-based multiple is typical for pure software-as-a-service companies with massive scalability and high gross margins, but it is rare for tech-enabled services. If you have significant development costs, valuing your business on revenue might look attractive, but institutional buyers will heavily discount it if your net margins are low. Instead, you should focus on maximizing your adjusted EBITDA multiple by clearly separating your capital expenditures from your operating expenses. Ensure your historical software development costs are properly capitalized rather than expensed, which immediately increases your reported EBITDA. Then, use your Step by Step Exit framework to prove that these upfront development costs have built an operational superstructure that is now fully scalable. Show the buyer that your recurring service revenues are high-margin and that your future capital needs are minimal. By presenting a clean, adjusted EBITDA that reflects a highly efficient, automated operating model, you can often command a double-digit EBITDA multiple. This strategy is far more defensible to a sophisticated buyer than trying to force a tech-style revenue multiple on a services-heavy business.