How does growth affect valuation?
Growth raises the earnings a multiple is applied to, which is certain. Whether it raises the multiple itself is far less well evidenced than the figures in circulation suggest.
Two different questions get answered as one here. Growth raises the earnings your multiple is applied to, which is arithmetic and certain. Whether growth also raises the multiple is a separate claim, and the specific figures attached to it, usually half a turn to a full turn above some growth threshold, have no published source we could find.
Why the multiple should move, in principle
At 5× EBITDA a buyer is paying for years six onward. Growth makes those years bigger, so the same multiple buys more, and a rational buyer will pay a higher multiple for the same current earnings. That is the mechanism, and it is sound.
What is missing is a measurement of how much, on businesses the size of yours.
The closest thing to evidence
GF Data classifies a business as an above-average financial performer when it has both an EBITDA margin of at least 10% and trailing revenue growth of at least 10%. In 2024, businesses meeting that test received a 15% valuation premium over weaker peers, down from 22% to 28% in the years 2020 to 2023.
Two caveats before you use that figure. It bundles margin with growth, so it cannot be separated into "the growth part" and "the margin part." And GF Data's population is private-equity-sponsored transactions, which are larger than most owner-managed sales.
It is still the only transaction-linked number here that comes from a source whose reporters are buyers rather than sellers' agents.
Explainable growth is worth more
This part does not depend on any published figure, because it is about what a buyer will underwrite.
| Explanation | How a buyer reads it |
|---|---|
| We hired two salespeople, revenue rose proportionally | Repeatable — they can hire two more |
| We raised prices 8% and lost no customers | Pricing power, the most durable kind |
| We launched a product that now runs at 20% of revenue | Capability, if you can do it again |
| The market was strong | Not attributable to the business |
| One large customer expanded | Concentration risk wearing growth clothing |
The trap
Growth funded by working capital that has not yet converted to cash raises EBITDA and lowers the bank balance at the same time. Buyers look at both, and a business growing 25% while receivables grow 40% invites a very specific question about whether the growth is real or timing.
Our guide on the gap between profit and cash sets out the seven places that gap comes from, and how long is your cash runway covers why growth consumes cash before it produces it.
Growth without margin
Revenue growth with flat or falling margin is usually read as buying business rather than winning it, which is consistent with GF Data requiring both conditions before it counts a business as an above-average performer. How profitability affects valuation covers why the two have to move together.
Sources
- GF Data (Association for Corporate Growth), quality premium for businesses with at least 10% EBITDA margin and at least 10% trailing revenue growth, as reported by Forvis Mazars, March 2025. https://www.forvismazars.us/forsights/2025/03/middle-market-deal-activity-advances-in-2024-is-momentum-building