The Hidden Graph: How Rising Revenue Can Still Destroy Value

Recently, I spoke with a prospective client whose business is performing exceptionally well. Although they have no immediate plans to sell, they intend to capture projected growth over the coming years to secure a more lucrative exit later on.

That dialogue sparked a reflection on a common blind spot for many business owners: a company’s revenue can climb even as its enterprise value drops.

When revenue and value move in opposite directions

While founders and boards consistently monitor profitability and revenue growth, enterprise value deserves an equally watchful eye. Its path can head downward even as core operational metrics improve, which carries critical consequences for timing an acquisition.

Take a hypothetical software-as-a-service provider bringing in $15 million in annual recurring revenue and commanding a 6x ARR valuation multiplier, giving it an implied enterprise value of $90 million. Two years later, ARR climbs to $20 million, but the multiple drops to 3.5x. Consequently, the enterprise value shrinks to $70 million. In this scenario, revenue jumped by 33%, yet overall value fell by 22%.

These figures serve purely as an example to illustrate how multiple compression can wipe out operating gains. For any founder who puts off a sale simply to hit a future revenue target, the lesson is stark: achieving that goal might still result in a smaller payout upon exit.

Qualitative, absolute and relative factors

The valuation multiple is shaped by several shifting elements. Qualitative considerations involve product differentiation, leadership strength, how heavily the company relies on the founder, the competitive landscape, and overall strategic value to prospective acquirers.

Absolute financial metrics encompass cash flow, EBITDA, and total revenue.

Relative performance metrics cover margins, growth, gross revenue retention, and net revenue retention. Even though retention figures are presented as percentages, they matter most because they highlight customer longevity and expansion potential. Prospective buyers evaluate all these data points collectively, benchmarking them against industry peers. As businesses mature, their absolute figures may rise even as their year-over-year growth slows down.

At the same time, enhanced profitability, improved customer retention, or a more robust leadership team can help sustain or boost the valuation multiple. The final valuation depends on the interplay of all these factors. Therefore, corporate boards must evaluate which operational traits are likely to strengthen over the next twelve months, which might weaken, and how potential acquirers will price those shifts.

M&A preparation should begin while you are winning

Executing a company sale involves thorough preparation, engaging interested buyers, negotiating terms, and navigating due diligence—a period where acquirers constantly scrutinize forecasts and ongoing performance.

Delaying action until a business slowdown becomes apparent can erode bargaining power and cast doubt on management’s future projections. Furthermore, strategic buyer appetite operates on its own schedule. An acquirer might place immense value on absorbing a specific technology, geographic footprint, or customer roster right now. That enthusiasm can easily fade following an internal product rollout, a shift in corporate budgets, or a rival acquisition.

Of course, waiting can still unlock substantial value if reaching a larger scale draws in more bidders, profitability increases, or customer concentration decreases. Boards can validate this strategy by mapping projected enterprise value directly against their operational roadmap, running scenarios where revenue increases while valuation multiples stay flat, rise, or shrink. Leadership should also evaluate how cash reserves, debt loads, share dilution, liquidation preferences, and deal structures will ultimately impact shareholder payouts. Since no one can accurately predict the exact peak of a valuation cycle in advance,

every choice to postpone an exit implicitly bets on future valuation growth—a trajectory that deserves a tracking graph of its own.

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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

Frequently Asked Questions

Can a company’s revenue increase while its enterprise value decreases?

Yes. As demonstrated by multiple compression—where the valuation multiple drops faster than revenue grows—a company can increase its annual recurring revenue while seeing a net decline in overall enterprise value.

What qualitative factors influence a company’s valuation multiple?

Qualitative factors include product differentiation, management quality, founder dependence, competitive intensity, and the strategic relevance of the business to potential buyers.

Why should founders prepare for M&A before a slowdown occurs?

Waiting until a slowdown is visible can weaken negotiating leverage, create skepticism regarding management’s projections, and risk losing the timely interest of strategic buyers whose priorities or budgets may change.

What relative performance metrics do buyers evaluate?

Buyers look at metrics such as growth rates, profit margins, net revenue retention, and gross revenue retention to gauge customer durability and expansion.

Is it possible to accurately predict the peak valuation of a company?

No, nobody can reliably identify the exact valuation peak in advance, which is why every decision to delay a sale carries inherent risk.