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Jeff Stevens & A.J. Wasserstein on The Future of Entrepreneurship Through Acquisition
In The Trenches
Risks and Opportunities in Revenue Multiples for Business Valuation
The speaker discusses the risks and potential sustainability of buying businesses on revenue multiples, highlighting the unpredictability of multiple expansion and the potential for multiple compression through a market cycle. They acknowledge the significant gains achieved by paying six times the entry multiple for businesses and eventually exiting at an average of 13.8 times. However, they caution that such high exit valuations may not be sustainable through a market cycle. The speaker emphasizes the uncertainty around maintaining revenue multiples and the real risk of multiple compression, especially in businesses with five to eight times annual recurring revenue (ARR) multiples. They also warn about the potential disastrous outcome of getting flipped into an EBITDA multiple and highlight the high risk of expecting expansion on an ARR multiple business.
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