The Hidden Metric: Why Rising Revenue Can Lead to Declining Value

During a recent phone call with a prospective client whose business is performing exceptionally well, I learned that an immediate sale is off the table. Instead, the owner plans to capture anticipated growth over the next few years to secure a higher valuation upon exit.

That discussion sparked a realization that frequently eludes business owners: a company can experience rising revenue alongside a drop in enterprise value.

When revenue and value move in opposite directions

While founders and boards consistently monitor profitability and revenue trends, enterprise value deserves an equally prominent graph. Its direction can head downward even as core operations improve, heavily impacting M&A timing.

Take a hypothetical SaaS enterprise bringing in $15 million in annual recurring revenue, priced at a 6x multiple, giving it an implied enterprise value of $90 million. Two years later, ARR climbs to $20 million, but the multiple contracts to 3.5x. Consequently, enterprise value shrinks to $70 million. In this scenario, revenue jumped by 33%, yet overall value fell by 22%.

These figures serve purely as an illustration to show how multiple compression can negate operating success. For any founder delaying an exit to hit a specific top-line target, the lesson is straightforward: achieving that milestone can still result in a smaller payout.

Qualitative, absolute and relative factors

The revenue multiple is shaped by various elements that shift independently. Qualitative criteria encompass management strength, the degree of founder dependence, market competition, product uniqueness and overall strategic value to potential acquirers.

Absolute financial metrics involve revenue, cash flow and EBITDA.

Relative performance metrics cover growth pace, profit margins, net revenue retention and gross revenue retention. Although retention is measured in percentages, its true value highlights customer longevity and expansion potential. Acquirers evaluate these indicators collectively against industry peers. As businesses scale, absolute figures often rise while growth speeds taper off.

Concurrently, enhanced profitability, stronger customer retention or a more robust leadership team can help sustain or elevate a valuation multiple. The final valuation relies on the interaction of all these variables. Therefore, boards must evaluate which attributes are likely to strengthen in the coming year, which might weaken, and how prospective buyers will value those shifts.

M&A preparation should begin while you are winning

Executing a successful sale demands thorough preparation, proactive buyer outreach, intense negotiations and meticulous due diligence—a period during which buyers continuously scrutinize performance and future forecasts.

Waiting to initiate a sale until a downturn is apparent can erode bargaining power and cast doubt on management forecasts. Furthermore, strategic buyers operate on their own timelines. A company might hold immense appeal today due to a proprietary technology, customer list or regional footprint, but that demand can evaporate following an internal build, a competitor acquisition, or shifting corporate budgets.

Delaying an exit can still generate substantial value if the added scale broadens buyer interest, boosts profitability, or reduces customer concentration. Boards can evaluate this strategy by mapping projected enterprise value directly against the operating roadmap, modeling different scenarios where revenue grows while multiples remain flat, increase, or decline. Leadership should also factor in how debt, cash reserves, equity dilution, liquidation preferences, and deal terms will ultimately impact shareholder proceeds. Because pinpointing the absolute peak valuation in advance is impossible, every choice to postpone a sale inherently bets on future valuation trajectories—a projection that deserves its own dedicated graph.

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Itay Sagie, a guest contributor to Crunchbase News, is a seasoned lecturer and strategic adviser to startups and investors, specializing in strategy, growth and M&A. You can connect with him on LinkedIn for further insights and discussions.

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Illustration: Dom Guzman

?Frequently Asked Questions

01Can a company grow revenue and still lose value?

Yes. As demonstrated by multiple compression, if the valuation multiple drops faster than revenue increases, the overall enterprise value will decline even though top-line revenue is higher.

02What is multiple compression in M&A?

Multiple compression occurs when the valuation multiple (such as a multiple of revenue or EBITDA) applied to a company decreases over time, often due to changing market conditions, slowing growth rates, or shifting buyer demand.

03When is the best time to prepare for a company sale?

M&A preparation should begin while the business is performing well. Waiting until a slowdown becomes visible can weaken negotiating leverage and create uncertainty for potential buyers.