I got off the phone with a potential client whose company is doing great. The client, however, is not even thinking of selling the company as they see future growth over the next couple of years that they wish to materialize in order to get a larger exit. Founders and boards routinely track revenue and profitability over time. But another graph deserves equal attention: enterprise value. Its trajectory can turn downward while the operating numbers continue improving, with significant implications for M&A timing. Consider a hypothetical SaaS company generating $15 million in annual recurring revenue, valued at 6x ARR. Its implied enterprise value is $90 million. Two years later, ARR reaches $20 million, but the multiple falls to 3.5x revenue. Enterprise value drops to $70 million. Revenue increased 33%, while value declined 22%. These are only illustrative assumptions to demonstrate how multiple compression can overshadow operating growth. For a founder postponing a sale until the...
learn more
