When EBITDA is negative, revenue is the metric left, and most of the spread in revenue multiples is growth, so the median peer is the wrong benchmark.
Use forward revenue, and pick the multiple from the peers' relationship between growth and multiple rather than from their median. On five illustrative peers, a regression of EV/revenue on growth gives a growing, loss-making company 4.73x forward revenue of 40.0, an enterprise value of 189.4 and equity of 204.4 with its net cash. The peer median of 3.9x would have given 156.0, 17.6 per cent less, because the company grows faster than the median peer.
Worked in full in The Private Markets Valuation Specialist by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
When EBITDA is negative an EBITDA multiple has nothing to multiply, and a DCF rests almost entirely on a terminal value years away. Revenue is the metric left. But revenue multiples spread far more widely across a peer set than earnings multiples do, and most of the spread is explained by one thing: growth. A fair value mark that takes the median revenue multiple and applies it to a company growing faster or slower than the median peer is not a market approach. It is an assumption that growth does not matter.
| Company | Revenue growth | EV / forward revenue |
|---|---|---|
| Peer 1 | 10% | 2.6x |
| Peer 2 | 15% | 3.9x |
| Peer 3 | 22% | 3.8x |
| Peer 4 | 30% | 6.0x |
| Peer 5 | 38% | 6.1x |
| Subject, loss-making | 25% | ? |
The subject's forward revenue is 40.0, against 32.0 for the last twelve months, and it holds 15.0 of net cash from its last funding round. Its EBITDA is negative, so the earnings multiple route is closed.
Multiple = a + b × growth, fitted by least squares across the peers
b = Σ(g − mean g)(m − mean m) ÷ Σ(g − mean g)² = 12.736, or 1.274 turns of revenue for every 10 points of growth. a = mean m − b × mean g = 4.48 − 12.736 × 0.23 = 1.551x. R² = 0.889.
In Excel, with growth in B2:B6 and multiples in C2:C6: =SLOPE(C2:C6,B2:B6), =INTERCEPT(C2:C6,B2:B6), =RSQ(C2:C6,B2:B6), and for the subject =FORECAST.LINEAR(0.25,C2:C6,B2:B6).
An R² of 0.889 says growth explains most of the differences in multiple across this set. The residuals are the rest: Peer 4 trades 0.63 above its fitted value, Peer 3 0.55 below. Each is a question for the file, such as a margin, a customer base or a recent event, not noise to be ignored.
Subject multiple = 1.551 + 12.736 × 0.25 = 4.73x
Enterprise value = 4.73 × 40.0 = 189.4. Equity value = 189.4 + 15.0 of net cash = 204.4.
| Approach | Multiple | Enterprise value | Equity value |
|---|---|---|---|
| Peer median | 3.9x | 156.0 | |
| Growth-adjusted regression | 4.73x | 189.4 | 204.4 |
| Difference | 33.4 |
The median belongs to a peer growing 15 per cent. The subject grows 25. The regression charges the subject for the difference at the rate the market charges the peers, which is the point of a market approach. Before the figure goes into a mark it should still be calibrated: if the last round priced the company off this line, carry that difference forward and explain any change, as in calibrating a valuation to the entry price.
| Subject growth | Multiple | Enterprise value | Equity value |
|---|---|---|---|
| 15% | 3.46x | 138.4 | 153.4 |
| 20% | 4.10x | 163.9 | 178.9 |
| 25% | 4.73x | 189.4 | 204.4 |
| 30% | 5.37x | 214.9 | 229.9 |
| 35% | 6.01x | 240.3 | 255.3 |
Each five points of growth moves enterprise value by about 25. That makes the growth forecast the main judgement in the mark: a valuation committee should see the subject's growth evidenced as carefully as the peer set. Dropping one peer at a time moves the multiple between 4.53x (without Peer 4) and 4.95x (without Peer 5), an enterprise value range of 181.3 to 197.8. With five peers, that range belongs in the valuation memo.
One regressor or two? With five peers, one explanatory variable is the most the data can carry. With a dozen, a second one, such as gross margin or growth plus profit margin, can be justified. Adding variables to five observations produces a fit that looks perfect and predicts nothing.
Mixing periods. The peers' multiples are on forward revenue; applying 4.73x to the subject's trailing 32.0 gives 151.5, understating enterprise value by 37.9, or 20.0 per cent: trailing revenue sits 20.0 per cent below forward revenue because the company grows 25 per cent. Trailing multiples on trailing revenue, forward on forward, and never one of each. For profitable companies the same chain runs on normalised EBITDA, worked in valuing a private company with an EBITDA multiple.
For a loss-making company, regress the peers' forward revenue multiples on growth and read the subject off the line: 4.73x and an enterprise value of 189.4 here, 33.4 above the median approach. Then test the peer set by dropping each name, and evidence the growth figure, because it drives the answer. The free workbooks for the book build the market approach link by link, with calibration and the roll-forward on the same file.
Whichever the peer multiples use, consistently. Applying an illustrative 4.73x forward multiple to trailing revenue of 32.0 instead of forward revenue of 40.0 gives 151.5 rather than 189.4, understating enterprise value by 20.0 per cent, the gap between trailing and forward revenue for a company growing 25 per cent.
Fit multiple against growth across the peers with SLOPE and INTERCEPT, then apply the line to the subject. On five illustrative peers each 10 points of growth is worth 1.274 turns of revenue, so a company growing 25 per cent gets 4.73x where the median peer, growing 15 per cent, trades at 3.9x.
Enough that dropping one does not change the answer much, and never more variables than the data can carry. With five illustrative peers, dropping one at a time moves the multiple between 4.53x and 4.95x, an enterprise value range of 181.3 to 197.8, which should be reported.
This article is one calculation from The Private Markets Valuation Specialist. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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