How profitability affects valuation
Margin does not just raise the earnings the multiple is applied to — it raises the multiple itself. Why the effect compounds, and what a five-point improvement is actually worth.
Margin enters the valuation twice. Once as the earnings the multiple is applied to, and again as evidence about what kind of business this is. The second effect is the one owners underestimate.
The compounding, in numbers
Two businesses, both at €2M turnover.
| Company A | Company B | |
|---|---|---|
| Revenue | €2,000,000 | €2,000,000 |
| EBITDA margin | 8% | 22% |
| EBITDA | €160,000 | €440,000 |
| Multiple applied | 3.5× | 5.5× |
| Enterprise value | €560,000 | €2,420,000 |
Margin is 2.75× higher. Value is 4.3× higher. The extra factor is the multiple, and the multiple moved because a buyer reads a 22% margin as pricing power, cost discipline or a structural advantage — all of which make next year's earnings more believable.
Why higher margin earns a higher multiple
Resilience. A business at 22% can absorb a 10% revenue fall and stay profitable. One at 8% cannot. The buyer is pricing the downside, and margin is the cushion.
Evidence of pricing power. Sustained above-sector margin usually means customers are not choosing on price alone. That is the most durable competitive position there is, and buyers pay for it.
Room to invest. A high-margin business can fund growth from its own earnings. A low-margin one needs the buyer's capital, which is deducted from what they are willing to pay.
The margin buyers do not pay for
The test a buyer applies: could the business hold this margin for three more years without something breaking? If the answer requires you personally to keep working sixty-hour weeks, the answer is no.
Where margin usually hides
Most owners looking for five points find them in three places, none of which are dramatic.
- Pricing — the single fastest lever, and the one most owners leave untouched for years
- Customer mix — the bottom quintile of customers is frequently loss-making once service time is counted
- Product mix — margin per product after real cost price rarely matches what anyone assumed
- Discounting that became habitual and was never re-examined
- Fixed costs that grew during a good year and were never revisited
The first two are worth more than the rest combined, and both are measurable from data you already have.
Timing matters
A margin improvement demonstrated over two years is worth far more than one demonstrated over two quarters. Buyers discount recent improvements heavily, because a margin that rose the year before a sale looks like preparation rather than performance.
If you intend to sell in three years, the margin work belongs in year one — not because it takes that long to do, but because it takes that long to become evidence. Preparing your business for sale covers the sequencing.
What to show
Margin by year, with the reason for each movement written next to it. A buyer who can see why margin moved will accept the level; a buyer who cannot will assume the worst explanation and price accordingly.
EBITDA multiple explained covers how margin sits alongside the other multiple drivers.