Valuation

When to use revenue or EBITDA multiples in Private Equity?

Revenue multiples are typically used for high-growth but unprofitable businesses, whereas EBITDA multiples are preferred for mature companies with controlled profitability ratios. However, for companies balancing both growth and profitability, choosing the right multiple is more complex as it directly influences investment decisions and exit strategies.

Table of contents

Introduction: why choosing the right valuation multiple matters

When valuing private companies using comparable methods, investors must determine which financial metric best reflects a company’s value. Revenue and EBITDA multiples are among the most commonly used valuation methods, but their relevance depends on a company’s financial performance, growth stage, and industry.

Revenue multiples are typically used for high-growth but unprofitable businesses, whereas EBITDA multiples are preferred for mature companies with controlled profitability ratios. However, for companies balancing both growth and profitability, choosing the right multiple is more complex as it directly influences investment decisions and exit strategies.

Understanding revenue and EBITDA multiples in private equity

What are valuation multiples?

Valuation multiples are financial ratios that compare a company’s market value to key financial metrics, helping investors determine a fair price for an asset. These multiples facilitate quick comparisons between companies, particularly in private markets where valuation data is scarce.

Two key categories exist:

  • Enterprise value (EV) multiples: These include EV/Revenue and EV/EBITDA, offering a comprehensive view of a company’s valuation, including debt and cash adjustments.
  • Equity value multiples: These measure valuation from an equity holder’s perspective, often using the Price-to-Earnings (P/E) ratio.

Revenue multiples: when are they relevant?

Revenue multiples (EV/Revenue or ARR multiples) assess a company’s value relative to its revenue. This metric is particularly useful for:

  • High-growth tech startups and SaaS businesses.
  • Companies with negative or volatile earnings.
  • Industries where long-term growth potential outweighs short-term profitability, particularly in R&D-intensive sectors.

How are revenue multiples calculated? The formula used is: EV/Revenue, where Enterprise Value (EV) includes equity value, debt, and cash, while Revenue is measured over a specific period.

Industry benchmarks

  • SaaS: Revenue multiples typically range from 4x to 12x, depending on growth rates and retention metrics.
  • Biotech: Due to high R&D investments, revenue multiples often exceed 10x.

EBITDA multiples: the standard for mature companies

EBITDA multiples (EV/EBITDA) measure valuation based on earnings before interest, taxes, depreciation, and amortisation. They are widely used in:

  • Profitable businesses with stable cash flows.
  • Traditional industries such as industrials, consumer goods, and financial services.
  • M&A transactions where operational performance is a key valuation driver.

How are EBITDA multiples calculated? EV/EBITDA. EBITDA multiples provide a clearer view of financial performance by excluding non-cash expenses such as depreciation and amortisation, as well as financing choices.

Industry benchmarks

  • Industrial manufacturing: Typically valued between 6x and 10x EBITDA.
  • Healthcare services: Valuations range from 8x to 15x EBITDA.


At what point do investors switch from EBITDA to revenue multiples?

The 20 to 30% revenue growth threshold: a critical valuation benchmark

In today’s investment landscape, many investors use a 20 to 30% revenue growth rate as a key indicator when deciding whether to use a revenue or EBITDA multiple. If a company’s revenue growth exceeds this threshold, revenue multiples are often favoured, as investors focus on scalability and market expansion rather than immediate profitability.

If revenue growth falls below this level, EBITDA multiples become more relevant, as investors prioritise margin control and cash flow generation.

This 20 to 30% range is not a strict rule but an observed trend in venture capital, growth equity, and private equity.

The Rule of 40: balancing growth and profitability

In SaaS and tech industries, investors often consider the Rule of 40, which states that a company’s revenue growth rate plus EBITDA margin should exceed 40%. This metric helps assess whether a company is maintaining a healthy balance between expansion and profitability.

Example 1: high-growth companies

  • A SaaS firm with 30% revenue growth and an EBITDA margin of 10% meets the Rule of 40. Investors are more likely to use revenue multiples, as market expansion takes precedence over profitability.

Example 2: balanced growth and profitability

  • A company with 15% revenue growth and an EBITDA margin of 25% also meets the Rule of 40. However, it may be valued using an EBITDA multiple due to its strong profitability profile.

Companies below this threshold often struggle to secure funding or trade at lower multiples compared to market averages due to insufficient profitability or weak growth prospects.

Beyond fundamentals: additional factors influencing valuation multiples

Investor sentiment and market conditions

Market conditions play a significant role in determining whether revenue or EBITDA multiples are preferred. During periods of economic expansion, investors favour growth and revenue multiples. Conversely, in economic downturns, profitability becomes a key criterion, leading to a shift towards EBITDA multiples.

Industry-specific valuation trends

Industry dynamics also affect valuation approaches:

  • Software companies generally command higher revenue multiples due to scalability and subscription-based models.
  • Capital-intensive industries (e.g., manufacturing, infrastructure) tend to have lower revenue multiples due to high operating costs and reliance on tangible assets.

How ScaleX Invest optimises valuation analysis for private equity investors

Exclusive dataset for more reliable comparables

ScaleX Invest leverages proprietary data sources and models:

  • Private market insights collected from tech entrepreneurs.
  • Public market benchmarks adjusted for private valuations.
  • Machine learning models that refine peer comparisons and valuation methodologies.

A hybrid approach: combining revenue & EBITDA multiples

With AI-powered valuation models, ScaleX Invest dynamically adjusts multiples based on market conditions and investment characteristics, offering:

  • Automated peer analysis using validated benchmarks.
  • Custom valuation scenarios tailored to investment and exit strategies.
  • API integration with reporting and CRM systems.

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FAQ

What is the main advantage of using EBITDA multiples over revenue multiples?

EBITDA multiples reflect profitability and provide deeper insights into cash flow generation.

Why do investors use revenue multiples for tech startups?

Most startups are not yet profitable, making EBITDA multiples less relevant. Revenue multiples help account for future growth potential.

When should a company switch from revenue to EBITDA multiples for valuation?

Companies with revenue growth below 20-30% are typically valued using an EBITDA multiple.

How does the Rule of 40 impact valuation multiples?

It helps assess whether a company maintains a healthy balance between revenue growth and profitability.

How does ScaleX Invest help alternative asset managers choose the right multiple?

Our AI-driven valuation models and proprietary dataset enhance comparability and valuation accuracy.

September 25, 2024
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