What Multiple of Revenue Is a Business Worth?
Why This Shortcut Persists and Why It Fails Most Owners
Executive Framing: The Most Common Valuation Mistake
One of the most common sentences spoken by business owners is also one of the most dangerous:
“Businesses like mine sell for X times revenue.”
That belief is rarely malicious. It is usually learned from a CPA, repeated by peers, or reinforced by articles that reduce valuation to something that feels simple and accessible.
The problem is not that revenue multiples exist.
The problem is when they are misapplied and what happens when reality intervenes.
In the lower and middle markets, revenue multiples are often treated as valuation truth. In practice, they are a narrative shortcut that frequently collapses once buyers, lenders, and diligence teams enter the process.
To understand why, owners must shift perspective from how a business looks to how it finances.
Section One: Revenue Is Visibility, Not Value
Revenue tells you how large a business appears.
It does not tell you what the business can support.
Consider two businesses:
- Company A
$5 million in revenue
20 percent net margin
$1 million in annual profit
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Company B
$5 million in revenue
5 percent net margin
$250,000 in annual profit
On the surface, they look identical. Same revenue. Same industry. Same headline number.
If both were marketed at “1x revenue,” each would carry a $5 million valuation.
But here is the problem.
A buyer of Company B would need twenty years of perfect performance just to recover principal before considering financing costs, risk, or return. No institutional lender would finance that transaction. Most sophisticated buyers would not pursue it.
Revenue created visibility. Profitability determined value.
This distinction is where valuation expectations either stay grounded or quietly drift into fiction.
Section Two: The Financing Ceiling Most Owners Never See
In the lower middle market, most acquisitions are not cash purchases. They are leveraged transactions. That reality imposes a hard constraint on valuation.
Lenders do not finance revenue.
They finance documented, historical cash flow.
Under SBA and conventional underwriting standards, lenders evaluate whether a business can support acquisition debt at an acceptable Debt Service Coverage Ratio (DSCR), typically requiring a margin of safety above breakeven.
This creates a financing ceiling that exists independently of:
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Asking price
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Industry chatter
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Revenue-based rules of thumb
When a revenue multiple implies a price that exceeds what cash flow can safely support, the valuation does not stretch upward. It compresses downward.
That compression is not theoretical. It is enforced by underwriting guidelines and risk committees.
Section Three: When Revenue Multiples Collide With Reality
When a revenue-based valuation exceeds financeable value, one of three outcomes typically follows:
-
The Buyer Pool Shrinks
Buyers who require bank financing are eliminated. What remains are cash-heavy buyers who tend to be more selective and more price-sensitive. -
The Deal Structure Shifts
To bridge the gap between price and financeability, transactions introduce:-
Seller financing
-
Earnouts
-
Holdbacks
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Contingent consideration
These structures do not restore value. They defer certainty and shift risk back to the seller.
-
-
The Price Retrades
During diligence, buyers often lower the price based on new financial findings. This is known as a re-trade. It is one of the most common sources of frustration and deal failure for sellers who anchored too early to revenue multiples.
Revenue multiples rarely fail at the listing stage.
They fail when scrutiny replaces optimism.
Section Four: Why the Shortcut Persists Anyway
If revenue multiples are so fragile, why do they persist?
Because they are:
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Easy to explain
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Easy to repeat
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Emotionally satisfying
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Useful for early conversations
They also allow owners to anchor expectations before harder questions are asked.
The risk is not using a revenue multiple as a conversation starter.
The risk is treating it as a valuation conclusion.
Section Five: When Revenue Multiples Actually Apply
Revenue multiples can be appropriate in specific circumstances, most notably in:
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SaaS and technology-enabled businesses with highly recurring revenue
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Asset-light, scalable models
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Minimal owner dependency
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Clear paths to margin expansion
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Buyer demand that is not dependent on leverage
This is why owners hear about software companies selling for five, eight, or ten times revenue and assume similar logic applies to service-based or trade businesses.
In most lower middle market companies, particularly in construction, healthcare, and owner-operated services, earnings-based valuation methods dominate because they reflect what buyers can finance and sustain.
Section Six: The Better Question Owners Should Ask
The more useful question is not:
“What multiple of revenue is my business worth?”
It is:
“If I were the bank, would I feel comfortable lending 70 to 80 percent of the purchase price based on the last three years of my tax returns?”
If the answer is “probably not,” the revenue multiple is not a valuation.
It is a fantasy.
Closing Perspective
Revenue multiples are not wrong.
They are incomplete.
When owners rely on them without understanding financing constraints, they risk building expectations that cannot survive diligence. The cost shows up in price reductions, deferred proceeds, or deals that never close.
Understanding this distinction before going to market preserves leverage, credibility, and optionality.
That is where real valuation begins.