Why Higher Revenue Doesn't Always Mean a Higher Business Valuation
Business owners naturally compare their companies to others that have recently sold.
One of the most common comments I hear is:
"A business like mine sold for $5 million. We do more revenue than they do, so why isn't ours worth more?"
It's a fair question, but the answer is more complex than many people realize.
Revenue Is Only Part of the Equation
Revenue is an important measure of the size of a business, but buyers don't determine value based on revenue alone.
One of the first questions I ask is:
How was that business valued?
For many owner-operated businesses, buyers focus on Seller's Discretionary Earnings (SDE). Larger companies are often valued using EBITDA. While both measure profitability, they are designed for different types of businesses and can produce very different valuation outcomes.
Without knowing which earnings metric was used, comparing sale prices can be misleading.
The Valuation Multiple Matters Too
Even if two businesses are valued using the same earnings metric, they may receive very different valuation multiples.
That's because buyers evaluate much more than the financial statements. They also consider:
• The strength of the management team
• Customer concentration
• Recurring or contracted revenue
• Owner dependence
• Industry demand
• Overall business risk
These factors influence how attractive a business is to buyers and, ultimately, what they are willing to pay.
Don't Compare Headline Sale Prices
Imagine hearing that a house sold for $1 million.
Without knowing the neighborhood, square footage, condition, or features, that number doesn't tell you what your own home is worth.
Business valuations work the same way.
The sale price is simply the final result. Understanding how that number was determined is far more important than the number itself.
Ask Better Questions
Instead of asking,
"What did that business sell for?"
Ask questions like:
1. Was the business valued using SDE or EBITDA?
2. What valuation multiple did it receive?
3. Why did buyers pay that multiple?
The answers to those questions provide far more insight than the sale price alone.
Every business is different. Revenue is only one piece of the puzzle. A thoughtful valuation looks beyond the top line to evaluate earnings, risk, growth opportunities, and the qualities that make a business more attractive to buyers.
If you're thinking about selling your business, understanding those factors before going to market can make a significant difference in both buyer interest and valuation.