Two different questions, dressed as one number
A revenue multiple and an EBITDA multiple answer different questions. An EBITDA multiple prices what the business keeps — enterprise value per dollar of normalised earnings. A revenue multiple prices what the business generates — enterprise value per dollar of top line, before any cost is deducted. Both are market-approach methods recognised under IVS 104 (the international valuation standard governing market-based methods), and both must be reasoned and evidenced, not merely asserted, to meet APES 225 (the Australian professional standard for valuation engagements). For most trading businesses these two measures should converge on a similar enterprise value, because a revenue multiple is nothing more than an EBITDA multiple pre-multiplied by the margin the market expects that revenue to convert to. Where they diverge sharply — where a revenue multiple produces a materially higher or lower value than an EBITDA multiple applied to the same business — one of two things is true: either the business genuinely belongs in the narrow band of cases where revenue is the more reliable measure, or someone has selected whichever multiple produces the answer they wanted. A valuer's job is to work out which.
When is a revenue multiple legitimate?
Revenue multiples are not a shortcut or a lesser methodology — in specific circumstances they are the more defensible measure, because profit is unreliable or genuinely not yet the point.
- ·Recurring or contracted revenue: subscription software, managed services, rent rolls and financial planning books with high renewal rates are valued on revenue (often annual recurring revenue) because the revenue stream itself is the asset being sold — its durability, not this year's margin, is what a buyer is pricing. A rent roll trades on a multiple of trail commission for exactly this reason.
- ·Rule-of-thumb sectors with standardised cost structures: some retail, hospitality and franchise categories have historically been priced on a multiple of turnover (or of turnover plus stock) because operators in the category run comparable margins, and turnover is observable and hard to manipulate where profit reporting is thin or cash-affected.
- ·Loss-making or pre-profit growth businesses: where EBITDA is negative or immaterial, there is no earnings figure to capitalise. Revenue multiples — drawn from comparable transactions in the same growth stage — become the primary market evidence, usually cross-checked against a discounted cash flow where forecasts can be substantiated. This is standard for early-stage SaaS and scaling e-commerce businesses, and is covered in depth in how a loss-making business is valued.
- ·Businesses where profit is heavily distorted: significant owner add-backs, related-party pricing, or a recent restructure can make normalised earnings genuinely contestable in the short term, while revenue is comparatively hard to dispute. Revenue may serve as a sense-check even where earnings remains the primary method.
How do you convert a revenue multiple to an EBITDA multiple?
A revenue multiple converts to an EBITDA multiple by dividing it by the business's EBITDA margin, because the two are connected by that same margin: revenue multiple = EBITDA multiple × EBITDA margin. A business with a 20% EBITDA margin valued at 4.0x EBITDA implies a revenue multiple of roughly 0.8x. Run the bridge in the other direction and it becomes a diagnostic: if a broker or an owner is quoting 1.5x revenue for a business with a 10% margin, that implies an EBITDA multiple of 15x — a figure that would be extraordinary for a private SME and immediately demands scrutiny of either the margin, the multiple, or both. A valuer builds this bridge explicitly whenever a revenue multiple is proposed, cross-checks it against comparable EBITDA multiples for the sector and size band, and treats any material gap between the two as something to explain, not to ignore. Where the bridge cannot be reconciled, that is usually evidence the revenue multiple is being borrowed from the wrong comparable set — see below.
EBITDA, SDE and PEBITDA — matching the earnings measure to the business
EBITDA multiples, SDE multiples and PEBITDA multiples are three different conventions for pricing profit, and they are not interchangeable: EBITDA assumes a market-rate manager runs the business, SDE folds the owner's own labour back in, and PEBITDA sits between the two. Mixing them produces the same distortion as mismatching revenue and earnings multiples.
- ·EBITDA (earnings before interest, tax, depreciation and amortisation): the standard measure for businesses with material management structure beyond the owner — typically where normalised EBITDA is above roughly $500k and the business could plausibly run under a general manager. Multiples quoted in Australian mid-market and broker transaction data are usually expressed on this basis.
- ·SDE (seller's discretionary earnings, sometimes called owner earnings): EBITDA plus the full value of the owner-operator's own labour, used for small owner-operated businesses where the owner's role and their return on capital cannot realistically be separated — most trades businesses, single-site retail and single-practitioner practices. SDE multiples are typically lower than EBITDA multiples for the same business, because SDE is a larger number (it has not been reduced by a market wage for the owner). This is the single most common source of confusion for owners reading US-sourced 'multiple' charts online, which are almost always built on SDE, not EBITDA — see the ebitda multiples by industry benchmark for the Australian evidence and the SDE-versus-EBITDA distinction in more detail.
- ·PEBITDA (proprietor-adjusted or 'personal' EBITDA): a working label some advisers use for EBITDA normalised specifically for one owner-manager's remuneration and related-party arrangements, distinct from a fully corporatised EBITDA that assumes an arm's-length management team throughout. It sits conceptually between SDE and EBITDA and is really a normalisation choice rather than a separate multiple convention — but it needs to be labelled and disclosed, because a multiple sourced from fully corporatised comparables should never be applied to a PEBITDA figure without adjustment.
Classic abuse #1 — cross-sector multiple borrowing
The most common misuse is applying a multiple observed in one sector, size band or geography to a business that does not share its risk profile. A software business with 90% recurring revenue and a 30% EBITDA margin might support 6–8x EBITDA on strong comparable evidence; a construction subcontractor with lumpy project revenue and a 6% margin will not support the same multiple even if an owner has seen '6–8x' quoted somewhere for 'a business like mine.' The sectors that get borrowed from most often in practice are technology (multiples pulled into services or trades businesses that share none of technology's margin or scalability), franchising (multiples that already price in brand support and territory protection being applied to independent operators without either), and listed-company trading multiples (which price a liquid, diversified, professionally managed asset and require a substantial discount before they say anything about an illiquid single-owner private company). A valuer's defence against this is naming the comparable set explicitly and testing whether the entity being valued actually shares the characteristics — margin, growth, concentration, management depth — that produced the borrowed multiple.
Classic abuse #2 — top-line multiples on low-margin businesses
The second classic abuse runs the margin bridge backwards deliberately: quoting a revenue multiple for a business where a profit-based valuation would produce a materially lower figure, and hoping the buyer, the family member, or the ATO does not run the conversion. It shows up most often in businesses with thin or volatile margins — wholesale and distribution, low-margin retail, and subcontracted trade services — where a 0.5x or 1x revenue figure sounds modest but implies a double-digit EBITDA multiple once the margin bridge is applied. It also shows up where 'revenue' is quoted gross of a pass-through cost that should net down before any multiple is applied — freight-forwarding and some agency or distribution arrangements are common examples, where gross billings materially overstate the revenue base a buyer is actually acquiring economics from. The test in both cases is the same: run the bridge, compare the implied EBITDA multiple against genuinely comparable transaction evidence, and treat an unreconcilable gap as a reason to reject the revenue multiple, not a reason to adopt it.
How a valuer selects and evidences a multiple
Selecting either type of multiple defensibly follows the same discipline, and under APES 225 the reasoning has to be reported, not just the conclusion. The valuer identifies comparable transactions or listed comparables and documents why they are genuinely comparable — sector, size band, growth profile, margin structure and geography all need to line up, not just the headline industry label. Adjustments are made and disclosed for the differences that remain: customer concentration, recurring-revenue proportion, owner dependence, contract duration, and the quality and consistency of the financial records. The selected multiple is corroborated against a second methodology — typically capitalisation of maintainable earnings as the primary measure with a net asset value floor, or a discounted cash flow cross-check where the business is pre-profit and credible forecasts exist. Sensitivity analysis shows what the concluded value looks like at the selected multiple plus and minus a reasonable margin either side, so the report demonstrates a range rather than a single asserted figure. And the entire chain — comparables, adjustments, margin bridge, cross-check, sensitivity — sits in a working file that can be produced if the value is later queried. That evidence trail is what separates a supportable multiple from a number an owner, a broker or an eager buyer simply asserted.
Where this fits an engagement
For most trading businesses, EBITDA-based methodology (capitalisation of maintainable earnings, cross-checked against comparable EBITDA multiples) is the primary approach, with revenue multiples used as a sanity check via the margin bridge rather than the leading measure. For recurring-revenue businesses, rent rolls, financial planning books and pre-profit growth businesses, a revenue-based multiple genuinely earns its place as the primary or co-primary methodology, and the report should say so explicitly and explain why. Prismi's Comprehensive engagement (from $3,995 + GST, 15–25 business days) tests the appropriate methodologies for the entity with the multiple selection reasoned and evidenced in the report; the Defensible Valuation File (from $8,995 + GST, 25–35 business days) adds the full comparable-evidence pack for matters likely to face scrutiny — a related-party transfer, a Div 152 small business CGT concession claim, or a sale where the multiple applied is contested. Reports are prepared with regard to the ATO's market valuation guidelines and APES 225, and documented so the position is defensible if reviewed. Fees are fixed at engagement and never contingent on the outcome; if a client wants us to select whichever multiple produces a target figure, we will say so and decline the engagement on those terms. Prismi prepares independent valuations only — we are not tax agents, and how the concluded value is applied to a CGT, Division 7A or sale-negotiation question is your accountant's or lawyer's domain.