Valuation in M&A: Is It Industry-Specific?

How Valuation Multiples Vary

When it comes to valuing a business in mergers and acquisitions, the type of valuation metric used—whether a multiple of revenue or EBITDA—often depends on the industry and specific characteristics of the company. These metrics are key indicators for buyers assessing a business’s worth and growth potential. This article explores the nuances of valuation multiples, why they differ across sectors, and how they influence deal negotiations.

Revenue Multiples for Simpler Models

Companies like medical practices, accounting firms, or small manufacturing businesses often sell for a multiple of revenue. These businesses typically have straightforward operations, and buyers focus on acquiring the customer base rather than robust recurring revenue or profitability.

Recurring Revenue Drives Higher Multiples

Businesses with contractually recurring revenue—such as software companies—command higher revenue multiples. Buyers value consistency and predictability, making metrics like annual and net recurring revenue critical. For example, in the software sector, revenue multiples might range from 3x to 6x, depending on factors like customer retention and growth.

EBITDA Multiples Reflect Profitability

For most businesses, valuation hinges on EBITDA—earnings before interest, taxes, depreciation, and amortization—which measures profitability. Companies with higher growth and larger EBITDA typically receive higher multiples. Conversely, smaller or mature businesses with lower growth might attract lower multiples.

High Multiples for Unique Intellectual Property

Companies with groundbreaking intellectual property, large addressable markets, or rapid growth—such as biotech or innovative technology firms—can achieve double-digit multiples. Even before scaling significantly, these businesses are valued for their future potential.

Key Terms

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A profitability metric reflecting the cash flow of a business, commonly used in valuations.

Recurring Revenue: Revenue generated regularly through contracts or subscriptions, which enhances predictability and increases valuation appeal.

Logo Retention: A measure of customer retention that evaluates how many clients continue their contracts over time, affecting valuation metrics.

Why It Matters

Understanding valuation metrics provides essential insights into how buyers perceive value. Whether your business is assessed based on revenue or EBITDA depends on its structure, growth trajectory, and the recurring nature of its income. For sellers, preparing the right metrics and understanding how these multiples apply can significantly influence the outcome of negotiations.