Most Business Valuations Miss the Mark

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Hey, it’s David!

Buying an established business often seems like a good, safe idea: recurring revenue, loyal clients, and low overhead.

So when a seller throws out a 1.5x revenue multiple, it sounds reasonable.

But here’s the thing: that number is often meaningless.

Buyers who rely on revenue multiples alone either overpay or miss great deals because valuation isn’t about top-line numbers, it’s about stickiness, scalability, and profitability.

…I wonder if we will be riding a jet stream?

I was talking with my seatmate as we were cruising at 35,000 feet. Our conversation was flowing around business topics. He shared, "I’m looking at buying a small business. The owner says it’s worth 1.5x revenue, but I don’t know if that’s high, low, or just made up. How do you actually value these things?"

I smiled. Classic M&A question.

"Well," I said, "1.5x revenue isn’t necessarily wrong…but it’s also not the full story. Businesses are valued in different ways, and if you just go by revenue, you might be overpaying."

"So, what actually matters?" he asked.

"Think of it this way," I said. "Would you rather buy a $10M firm where clients are locked in for life… or a $10M firm where half the clients disappear as soon as the owner retires?"

He nodded. Now we were getting somewhere.

If You’re in the Room, You Need to Speak the Language

Whether you’re a business owner, attorney, accountant, consultant, or capital advisor, valuations impact the deals you work on, even if you’re not the one running the model.

When the question is asked, “Is this a good deal?” or “What’s my business worth?” This is being asked by a party looking for insight, not just a number.

Here’s what the best professionals understand about valuation that keeps them indispensable in high-stakes conversations:

Revenue Multiples Are a Starting Point, Not the Whole Story

• Saying a business is worth “1x revenue” is easy, but not all revenue is created equal.

• A firm with high-margin, advisory-driven services is valued differently than one relying on low-margin, transactional work.

Ask & understand: What’s the revenue mix? How predictable is it?

EBITDA Doesn’t Exist in a Vacuum

• A strong EBITDA today doesn’t guarantee future earnings. What happens when leadership changes or operational structures shift?

• Buyers aren’t just acquiring numbers, they’re acquiring the ability to sustain them.

Ask & understand: What operational dependencies could impact future profitability?

Scalability Separates Good from Great

• Two firms might both show $10M in revenue at a 20% margin but if one requires 10 partners billing 60-hour weeks, its long-term value is different.

• Buyers prioritize firms that scale efficiently without exhausting key talent.

Ask & understand: Is growth dependent on adding more people, or is there a scalable structure in place?

Valuation Is a Negotiation Tool, Not Just a Calculation

• A firm with strong client retention, next-gen leadership, and documented processes will command a premium multiple over one reliant on a single rainmaker.

• Valuations reflect more than just numbers, they reflect perception.

Ask & understand: What risks will a buyer see, and how do we proactively address them?

Numbers Matter, But the Narrative Moves Deals

In high-stakes conversations, credibility isn’t about quoting valuation multiples, it’s about understanding what drives them.

If you’re advising on a deal, structuring a transaction, or supporting a valuation, your expertise adds the most value when it connects numbers to strategy.

So next time the conversation turns to valuation, are you prepared to offer perspective that moves the deal forward?

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David