Not All Revenue Is Equal: A Seller’s Guide to What Buyers Really Value

By Ramesh S. Mahalingam – Ideal Capital Insights

The Revenue Illusion

“We grew 25% this year. Why isn’t our valuation reflecting that?”

That question, or some version of it, has come up in very many conversations I’ve had with sell-side clients over the years. For many founders and management teams, revenue feels like the most intuitive indicator of value. It’s visible. It’s growing. It’s exciting.

But in M&A, buyers don’t just look at revenue; they interrogate it. They ask:

• Is it recurring or one-off?

• What does it cost to generate and sustain?

• How predictable is it next year, or for that matter, next quarter?

• Is it concentrated in a few customers or spread across many?

In other words, valuation depends not just on how much revenue a business earns, but how reliably, profitably, and sustainably it earns it.

This article is a practical guide to help sellers recalibrate their understanding of how revenue impacts valuation - and how buyers actually interpret it. Let’s debunk the common myths that inflate expectations and derail deals.

Myth #1: “We grew revenue 20%, so our valuation should go up.”

Reality: Growth adds value but only when it’s sustainable, profitable, and capital-efficient.

Revenue growth on its own doesn’t impress a sophisticated buyer. What he/she wants to know is: What drove the growth? Is it repeatable? What did it cost you (in discounts, marketing, sales effort to achieve it? What strain does it put on your working capital? Has your overall margin improved or deteriorated? In short, is the growth accretive to the bottomline?

Case-in-point: A regional IT services firm reported 22% revenue growth by underpricing long-term projects. EBITDA margins dropped, and free cash flow turned negative. Buyers offered a conservative multiple, not because growth is bad, but because it wasn’t valuable growth.

Listed company example: Groupon’s rapid growth in its early days masked profitability issues and scalability concerns, which led to a steep decline in market valuation post-IPO.

Myth #2: “Topline is at an all-time high - surely our multiple should follow.”

Reality: Buyers prioritize revenue quality, margin durability, and cash conversion - not headline figures.

High revenue doesn’t automatically command a high valuation. Buyers look at how much of that revenue drops to the bottom line, how sustainable it is, and how efficiently it is being converted into cash.

Case-in-point: A construction firm showed record revenues but operated at razor-thin margins and had AED 50 million locked in WIP. Buyers recognised the gap between reported earnings and actual cash inflows, and applied a valuation discount to reflect the associated liquidity risk.

Listed company example: Carillion plc in the UK showed strong revenue before collapsing under weak margins and cash flow issues.

Myth #3: “We’re profitable - why are they still picking apart our revenue?”

Reality: Profitability can mask underlying issues like revenue volatility, unsustainable margins, or accounting maneuvers that inflate short-term earnings.

Buyers don’t just accept profits at face value - they dissect how those profits are achieved. If earnings are driven by aggressive cost-cutting, one-off wins, or early revenue recognition, they may not hold up under scrutiny. Likewise, businesses that are technically profitable but suffer from poor cash flow or customer churn will see their valuations adjusted accordingly.

Case-in-point: A consulting firm reported strong year-end profits, but a deeper look showed back-loaded project billing, high staff attrition, and declining client renewal rates. The buyer reclassified some of the revenue as deferred and adjusted normalized EBITDA downward.

Listed company example: WeWork showed growing revenue and even reported periods of profitability on an adjusted basis (“community-adjusted EBITDA”), but buyers and investors flagged concerns about the sustainability of its business model, aggressive expansion, and creative accounting. Despite headline profits, valuation collapsed once the quality and durability of revenue were scrutinized more closely.

Myth #4: “That company got a 10x multiple - we should too.”

Reality: Valuation multiples aren’t transferable - they reflect revenue quality, risk, and strategic fit.

Benchmarking against headline deals ignores nuances like market positioning and margin profile.

Case-in-point: A logistics company compared itself to a 10x-deal peer but lacked recurring revenue and margin consistency. The buyer offered 5.5x.

Listed company example: The $27B Slack acquisition by Salesforce was based on unique strategic fit and stickiness - not replicable for every SaaS firm.

Myth #5: “We’re acquiring new customers rapidly, so value must be increasing.” [Typical of a tech startup]

Reality: Customer acquisition is valuable, but only if it is accompanied by retention, recurring revenue patterns, and healthy unit economics.

Buyers look deeper: Are customers sticking around? What’s the cost of acquisition (CAC)? Is the lifetime value (LTV) healthy?

Case-in-point: A food delivery startup added thousands of users via subsidies but had a 35% churn rate and an unviable CAC:LTV ratio. Buyers discounted valuation due to poor economics.

Listed company example: Blue Apron faced this challenge during its pre-IPO phase - high growth but low retention, and a high CAC, leading to a disappointing market reception.

Myth #6: “Our order book is full - we’re clearly more valuable now.”

Reality: Buyers value earned, proven revenue - order books are forecasts, not guarantees.

Buyers assess delivery track record, execution risks, and payment terms before crediting pipeline.

Case-in-point: An EPC player boasted a AED 400 million pipeline but couldn’t demonstrate margin control or timely execution. Buyers applied a risk discount.

Listed company example: Navistar faced valuation pressure during its defense contract phase, as future orders weren’t backed by predictable delivery and cost control.

Myth #7: “I landed a huge one-time contract - that must boost valuation.”

Reality: One-off deals don’t translate into future cash flows and are often excluded from valuation models.

Large, non-recurring revenue events look great on a P&L, but buyers typically normalize earnings to reflect the repeatable core of the business. A one-time government tender or windfall deal may be treated as an outlier.

Case-in-point: A UAE manufacturer won a major Expo 2020 supply contract, doubling revenue in one year. Since the deal wasn’t renewable, buyers viewed the spike as a non-repeatable event and discounted it in valuation models.

Listed company example: Peloton’s COVID-era boom resembled a massive, one-off “contract” with the market - driven by external, temporary conditions rather than a durable growth engine. Buyers (or public markets) later recognized that and adjusted expectations accordingly, treating the spike as an outlier rather than the new baseline.

Myth #8: “All revenue is good revenue.”

Reality: Revenue from low-margin, volatile, or cash-intensive sources can reduce value.

Buyers discount revenue that is seasonal, requires heavy working capital, or delivers low gross margins.

Case-in-point: A distributor locked in a large retail chain but had 90-day terms and single-digit gross margins. Buyers identified the strain on working capital and applied a discount to account for risk and margin dilution.

Listed company example: Tesco (UK) once pursued aggressive revenue growth through high-volume, low-margin sales and supplier rebates. While revenue looked strong, profitability and cash generation lagged. Eventually, this led to an accounting scandal in 2014 involving overstatement of profits, and a major writedown of its valuation, as investors and analysts re-evaluated the true economic quality of the revenue.

Myth #9: “We just launched a new revenue stream - doesn’t that lift our valuation?”

Reality: Early-stage revenue lines are often discounted until they prove traction, profitability, and stickiness.

Buyers want evidence of uptake, renewals, contribution margin, and low cannibalization of core business.

Case-in-point: A regional telecom operator launched a new digital health platform to diversify beyond core connectivity. While management highlighted it as a major new revenue stream, early adoption was limited, with unclear monetization and high churn. In valuation discussions, buyers and analysts treated the health vertical as experimental, assigning little to no value until clear signs of uptake, profitability, and strategic fit emerged.

Listed company example: Meta’s investments in the metaverse (via Reality Labs) have yet to contribute meaningfully to valuation, despite top-line reporting.

Myth #10: “We get 60% of revenue from three big clients. That shows strength, right?”

Reality: High customer concentration increases risk and reduces valuation multiples.

Dependency on a few clients signals vulnerability. Buyers apply risk discounts or demand safeguards.

Case-in-point: A regional in-flight catering firm derived over 70% of its revenue from just two major Gulf airlines. While volumes were high, buyers flagged the lack of diversification and exposure to airline-specific risk. This led to a valuation haircut and a conditional earnout structure tied to new client wins.

Listed company example: Intel faced investor concern in 2020 when Apple, its largest client, announced plans to move away from Intel chips.

The Mindset Shift Sellers Must Embrace

In M&A, revenue is only the starting point of the valuation discussion. Buyers aren’t dazzled by topline numbers alone. They look beneath the surface: at predictability, profitability, cash generation, and customer concentration.

If you’re preparing for a transaction, the key lies not in inflating your revenue story, it is in refining it. Ask yourself:

• How sticky is this revenue?

• What’s the margin profile?

• Is it concentrated or diversified?

• Does growth bleed cash or is it cash flow-accretive?

Buyers reward businesses that grow wisely, not just aggressively.

Sellers who internalize this perspective can make better strategic decisions, manage expectations, and build businesses that buyers truly value. And that’s the kind of revenue story worth telling.