Your EV/Sales Multiple Is Probably Measuring the Wrong Revenue

EV/Sales looks like the simplest multiple in finance. Enterprise value divided by revenue. Two numbers, one division.

The trouble is that revenue is not one number. It is a definition, and the definition moves the multiple more than the market does.

Gross versus net is the biggest single gap

A marketplace that processes a hundred million in transactions and keeps five million in commission can report either figure. One gives a multiple twenty times lower than the other on the same enterprise value.

Neither is wrong in itself. What is wrong is comparing a company reporting gross against a peer set reporting net, which happens constantly in payments, marketplaces, travel and advertising.

The rule: match the peer set. If the comparables report net revenue, use net revenue, whatever the company prefers to headline.

Not all revenue deserves the same multiple

Recurring subscription revenue, usage revenue, one-off implementation fees and hardware resale all sit on the same revenue line and are worth different amounts.

A business at eighty percent subscription and twenty percent services should not be valued at the same multiple as one at the reverse mix, even at identical total revenue. Separating the lines and applying different multiples is more work and closer to the truth.

Pass-through revenue deserves particular care. If the company collects money and passes most of it on, that portion is not really theirs to be valued.

Annualised run rate is a forecast wearing a costume

Taking the best month and multiplying by twelve produces a number that is useful for internal planning and misleading in a valuation. It assumes no seasonality, no churn and no concentration.

Run rate is legitimate as a forward-looking input if labelled as one. It is not legitimate as the denominator in a multiple drawn from a peer set measured on trailing revenue.

The discipline that settles most arguments

Write the definition next to the number. Trailing twelve months, net revenue, excluding discontinued lines and pass-through, as at a stated date.

That single line removes most of the disagreement, because it makes explicit what each side assumed. It also makes the number reproducible, which is the test that matters when someone challenges it six months later.