Profit vs. Revenue: Which Matters More in a Deal?

In the active M&A market that exists throughout wealth management, we’ve all heard at least one less than humble brag about the RIA owner who got a mind-bending multiple. Rarely is it as simple as that though, and it’s worth identifying what metrics really matter in today’s deals: Revenue or profit margin?

Revenue Considerations?

No business can run from it: Revenue size is key, and it is the primary driver of multiple expansion. The bigger the business, the greater the value, implied market position and assumed growth potential. For this reason, we’d always recommend owners to focus on driving revenue over trying to optimize for profit creating an artificially high margin.

Profit Considerations?

While revenue drives margin expansion in a deal, profit margin (expressed as pro forma EBITDA) is what’s being multiplied. This should be a metric you track and manage to, as it indicates the ongoing reinvestment in the business. Avoid trying to maximize solely margin, as you will likely make decisions that affect long-term growth (one of your largest value drivers).

Balancing Revenue and Profit

If you’re looking to maximize the value of your business, there isn’t one measure more important than the other. Building the largest business that grows in the double digits annually, has capacity to continue to do so, and has a healthy margin that reflects reinvestment is preferable versus attempts to maximize cash flow and create an inflated profit margin.?

We’ll dive a bit deeper in our upcoming webinar, How to Maximize Your Firm’s Value.