Our software-enabled service business has exceptionally high gross margins but low net margins due to our heavy reinvestment in proprietary automation. How do we evaluate whether a revenue-based multiple or an EBITDA-based multiple with aggressive add-backs is the most strategic path for our valuation?

Question

Tyler Smith · Accepted Answer

Choosing between a revenue multiple and an EBITDA multiple depends on how you package your investment in growth. If your cash flow is depressed because you are building proprietary technology and AI-powered operations, a standard EBITDA multiple will undervalue your business. To determine the best path, you must conduct a detailed analysis of your expenses. If your reinvestments are truly discretionary, you can construct a defensible case for an EBITDA-based valuation using aggressive add-backs. You must clearly separate your standard operating expenses from your research and development costs. Show the Quality of Earnings auditors that if you paused your development work today, your net margins would immediately scale. On the other hand, if you are competing in a market where strategic buyers value market share and proprietary intellectual property, you should push for a revenue-based multiple. To do this, you must demonstrate software-like unit economics. Use your scorecard to highlight high customer lifetime value, low churn, and automated delivery workflows. In your planning sessions, use the Step by Step Exit Business Integrity Review to evaluate which methodology yields the highest net proceeds. If you cannot get the buyer to agree to a revenue multiple, your fallback is to use your V/TO to prove that your current automation investments will yield massive EBITDA growth within twelve months, justifying a higher forward-looking multiple.