Financial Intelligence
Business valuation: three methods and when to use them.
Valuation is not a precise number — it is a range produced by multiple methods. The spread between methods tells you as much as the midpoint.
Method 1: Revenue multiple
Best for: Early-stage SaaS, high-growth companies, companies with low EBITDA but strong ARR growth.
Valuation = ARR × Revenue multiple
| ARR Growth Rate | Revenue Multiple |
|---|---|
| < 10% growth | 1x – 3x |
| 10–30% growth | 3x – 6x |
| 30–60% growth | 6x – 10x |
| 60–100% growth | 10x – 20x |
| > 100% growth | 15x – 40x+ |
Limitation: Ignores profitability. Two companies with $2M ARR can have very different valuations if one is 40% EBITDA margin and the other is burning cash.
Method 2: EBITDA multiple
Best for: Profitable businesses, traditional industries, service businesses.
Valuation = EBITDA × Multiple
| Business type | EBITDA Multiple |
|---|---|
| SaaS (profitable) | 12x – 25x |
| Digital agency | 5x – 10x |
| Contractor / trades | 3x – 6x |
| E-commerce | 3x – 8x |
| Manufacturing | 4x – 8x |
Key adjustments: Add back owner salary above market rate. Normalize for one-time expenses. Remove personal expenses run through the business.
Method 3: Discounted cashflow (DCF)
Best for: Established businesses with predictable cashflows.
DCF = Σ [FCF_t / (1 + r)^t] + Terminal value / (1 + r)^n
| Input | Description |
|---|---|
| Free cashflow (FCF) | Operating cashflow minus capex |
| Discount rate | Typically 10–20% for private companies (higher risk = higher rate) |
| Growth rate | Conservative projection of FCF growth |
| Terminal value | Year 5 FCF × exit multiple, discounted back |
Which method to use
| Business stage / type | Recommended method |
|---|---|
| Pre-revenue / early | Revenue multiple (on ARR or forward ARR) |
| Growing SaaS (< 30% margins) | Revenue multiple |
| Profitable SaaS | Blend of revenue and EBITDA multiples |
| Service business | EBITDA multiple |
| Stable, predictable cashflow | DCF |
| Acquisition by strategic buyer | Highest of all three methods |
The valuation range
Run all three methods that apply. The output is a range, not a number. A strategic buyer may pay above the high end. A distressed sale may close below the low end. Understand the method that produces your number before quoting a valuation.
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