Valuation Frameworks

There are three valuation approaches, and a sound deal uses at least two as cross-checks. Revenue multiples are the fastest but the crudest — they ignore profitability entirely. Discounted cash flow (DCF) is the most theoretically sound but the most assumption-sensitive. Comparable transactions provide market-based evidence but depend on finding truly comparable deals. No single method is sufficient. The triangulation of methods is what produces a defensible valuation range.

1. Revenue Multiple Enterprise value divided by trailing or forward revenue. SaaS multiples range from 3-15x depending on growth rate, retention, and profitability. Apply the multiple to durability-adjusted revenue, not reported revenue. A $15M reported revenue business with 80% durability deserves a multiple applied to $12M, not $15M. The durability adjustment often matters more than the multiple debate.
2. Discounted Cash Flow Project free cash flows for 5-7 years, apply a terminal value, and discount to present value using the weighted average cost of capital (WACC). The DCF is only as good as its assumptions — which is why you validated the financial model in the previous lesson. Use the buyer's validated model, not the seller's optimistic one.
3. Comparable Transactions Identify 5-10 acquisitions of similar companies in the past 2 years. Adjust for size, growth rate, retention, and market conditions. The median multiple from comparable transactions provides a market-based anchor. Outliers on either side tell you what premiums or discounts the market applied for specific factors (growth premium, concentration discount).