The Invisible Graph: How Companies Grow Revenue And Still Lose Value
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.
The conversation prompted me to consider something I believe many entrepreneurs miss, and it’s this: Revenue can rise while enterprise value falls.
When revenue and value move in opposite directions
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 next revenue milestone, the practical implication is clear: Reaching that milestone may still produce a smaller exit.
Qualitative, absolute and relative factors
The revenue multiplier reflects several dimensions that evolve differently. Qualitative factors include management quality, founder dependence, competitive intensity, product differentiation and strategic relevance to buyers.
Absolute financial measures include revenue, EBITDA and cash flow.
Relative performance measures include growth, margins, net revenue retention and gross revenue retention. Although retention metrics are expressed as percentages, their importance lies in what they reveal about customer durability and expansion. Buyers assess these measures together and compare them with relevant peers. As companies mature, their absolute results can improve while their growth rates weaken.
Meanwhile, stronger profitability, better retention or deeper management capabilities may support a higher multiplier. The valuation outcome depends on the combined effect. Boards should therefore ask which characteristics will improve over the next year, which could deteriorate and how buyers might price those changes.
M&A preparation should begin while you are winning
A sale requires preparation, buyer engagement, negotiation and diligence, during which buyers continually reassess performance and forecasts.
Waiting until a slowdown becomes visible can weaken negotiating leverage and raise questions about management’s projections. Strategic buyer demand also follows its own timetable. A buyer may place substantial value on acquiring a particular technology, customer base or geographic presence today. That interest can diminish after an internal product launch, a competing acquisition or a budget change.
Waiting can still create considerable value when additional scale attracts more buyers, profitability improves or concentration falls. Boards can make that case tangible by reviewing estimated enterprise value alongside the operating plan, using scenarios in which revenue grows while the multiple holds, expands or contracts. They should also consider how debt, cash, dilution, liquidation preferences and transaction terms affect shareholder proceeds. Nobody can reliably identify the valuation peak in advance.
However, every decision to delay a sale embeds a view about future valuation. That view deserves its own graph.
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
