You know, you can have a crazy revenue, and still lose money, and your company can be bankrupt in a few months.
Revenue * multiple is just a common way of talking about it, especially because companies within the same industry tend to have similar multiples. In reverse if you notice two public (since the information is easy to find)companies with seemingly-similar businesses that have very different multiple, you can start looking into why, and the quarterly financial reports with high-level numbers like cash burn, outstanding debt, profits, or net income would be a great place to start :)
This is the common way media talks about it, either because they are (1) uniformed or (2) they only hear of top line revenue.
Companies are typically acquired for EBITDA * Multiple. However when their is a "strategic" acquisition (which this one is) then there is all sorts of weird math that potentially goes on.
Examples: (napkin math)
- Company being acquired has $100M in revenue, and $20M in EBITDA. Post close, they realize $20M in synergies, so they might buy the company at 20x * $40M Adjusted EBIDTA ($20M EBITDA + $20M new EBITDA from synergies)
- Company being acquired has $100M in revenue, and $20M in EBITDA. The acquirer is going to remove 100 engineers post close (100120k/yr = $12M) and therefore the new EBITDA is going to be $32M, and the company gets bought at 20x $32M EBITDA
At the end of the day, the ROI is really what matters.
It's also worth noting - most M&A does not realize the hypothesized deal value. So yes people are right to be critical, but without full details, being precise about what the true value of a company is nigh impossible.
The EBITDA calculation is at best a sanity check for the acquirer.
I'm just using industry nomenclature. When people sell to a PEG, they don't say "we're selling to a strategic".
Revenue is the proper starting point as it is the thing that can or can not be optimized and grown. Profitability of the revenue (now vs. future) is obviously a huge driver but it is not the right starting point.
So once the accounting statements are reviewed, then most of the acquisition talk is just a discussion over a multiplier?
Most likely a lot of the additional factors for the valuation multiple calculation are going to be around efficient customer acquisition, sales cycle payback periods, and different income percentages (operating, net). X factor would be if other competitors of the acquirer are also bidding on the acquiree.
let's say $10m in ARR * a 23x multiple
The way you get to the multiple is a combination of how fast the revenue is growing, how long you think that will keep up, and the margin of the revenue.
Craftsman Tools, for example, was probably not growing much or shrinking and likely had low margin revenue but I don't know.