What Drives Your Company's Valuation? A Founder's Guide

Valuation is often the first question founders ask about M&A. But valuation isn't a single number — it's the result of multiple factors that buyers weigh differently based on their investment thesis.

This guide breaks down what really drives valuation and where you can influence the outcome.

The Basics: Revenue vs. EBITDA Multiples

When Buyers Use Revenue Multiples

• High-growth software companies (over 30% YoY)
• Pre-profit or low-profit businesses
• Companies with clear path to profitability

When Buyers Use EBITDA Multiples

• Mature, profitable businesses
• Services companies
• Lower-growth but stable businesses

The Seven Key Valuation Drivers

1. Growth Rate

Higher growth = higher multiple. But the quality of growth matters:

• Organic growth is valued more than acquisition-driven growth
• Same-store growth matters for multi-location businesses
• Sustainable growth based on market tailwinds is preferred

2. Revenue Quality

Not all revenue is created equal:

• Recurring (SaaS, contracts) → Highest premium
• Repeat (high retention) → Strong premium
• Transactional (one-time) → Market rate
• Concentration risk (over 20% single customer) → Discount

3. Margin Profile

Both absolute margin and margin trajectory matter:

• Gross margin indicates business model quality
• EBITDA margin shows operational efficiency
• Margin expansion signals operating leverage

We'd rather pay a premium for a 25% EBITDA margin business with expansion potential than get a "deal" on a 15% margin business that's topped out.

4. Customer Metrics

For subscription/recurring businesses:

• Net Revenue Retention (NRR) — target greater than 100%
• Gross Revenue Retention (GRR) — target above 85%
• Customer Acquisition Cost (CAC) payback — target under 18 months

For services businesses:

• Customer concentration — no single customer over 15%
• Customer tenure — longer is better
• Churn rate — lower is better

5. Market Position

• Market size — Total addressable market
• Market share — Your position relative to competitors
• Competitive moat — What protects your business
• Market trends — Tailwinds vs. headwinds

6. Team & Operations

• Management depth — Can the business run without the founder?
• Key person risk — Who are the critical employees?
• Documentation — Are processes documented and repeatable?
• Scalability — Can you grow without proportional cost increases?

7. Financial Health

• Cash flow consistency — Predictable cash generation
• Working capital efficiency — Cash conversion cycle
• Debt levels — Leverage appropriate for size
• Audit quality — Reviewed or audited financials preferred

What You Can Influence

High-Impact Improvements

1. Reduce customer concentration — Diversify revenue sources
2. Document key processes — Reduce key person risk
3. Clean up financials — Address any accounting issues
4. Build management team — Promote or hire to reduce founder dependence
5. Lock in contracts — Convert at-will customers to longer-term agreements

Lower-Impact (But Still Valuable)

• Improve facilities or technology infrastructure
• Formalize employee agreements and non-competes
• Clean up minor legal or compliance issues
• Optimize vendor relationships

Common Valuation Mistakes

The Bottom Line

Valuation is the product of:

• What you've built (financial performance, market position)
• How you prepare (documentation, team, presentation)
• How you run the process (competition, negotiation, timing)

You can't change your historical financials, but you can significantly impact how buyers perceive your business through thoughtful preparation and a well-run process.

Want a confidential valuation discussion? Reach out to our team.