Why is my valuation lower than I expected?
The short answer
Valuations come in low when the founder priced on revenue rather than trailing profit, used projections instead of history, left their own labour uncosted, or carries revenue concentrated in one customer or one channel. Each of those is arithmetic a buyer redoes in minutes, and the correction is then multiplied.
What usually causes the gap?
Most valuation gaps come from the base number rather than the multiple, and the base number is almost always trailing twelve-month profit. A founder expecting $150,000 and hearing $85,000 has usually made one of a short list of errors, and none of them are about the buyer being unreasonable. The multiple is where the argument happens. The profit line is where the money is lost.
Work out which of the causes below applies to you before responding to an offer. Arguing about a multiple when the disagreement is about profit wastes everybody's afternoon.
Did you price on revenue rather than profit?
Pricing on revenue is the single most common cause, and it inflates expectations by whatever your cost base happens to be. A business billing $6,000 a month with $2,000 of running costs is a $48,000-a-year profit business, not a $72,000-a-year one. At 3× that difference is $72,000 of price.
Buyers work in trailing annual profit because it tells them how long the business takes to repay them. Restate your own figure in that unit before you decide the offer is low.
Did you price on projections?
Projections carry no weight in a transfer at this size, because the buyer is acquiring what exists rather than what you believe is coming. A signed pilot, a feature in development or a channel you are about to open are all reasons for you to wait rather than reasons for a buyer to pay more now. If those things land, the trailing twelve months will show it in six months and the price will follow.
The trailing year is also unforgiving about direction. A business that did $60,000 of profit two years ago and $38,000 last year gets priced on $38,000, and often at the lower end of the range because the trend itself is a risk.
Have you costed your own labour?
Twenty hours a week of unpaid founder time is a cost the next owner inherits, and buyers price it whether or not it appears in your accounts. If you personally handle support, sales calls and deployments, the buyer is either doing that work themselves or hiring for it. Either way it comes out of the profit they can expect, so it comes out of the multiple or the price.
This is the difference between a business and a job that pays. Buyers can tell within one call which one they are looking at.
What else pulls a number down?
Several structural issues discount a price independently of profit. They tend to arrive together, which is why a valuation can land further below expectation than any single factor explains.
| Issue | What a buyer sees | Rough effect |
|---|---|---|
| One customer above 25% of revenue | Revenue that can halve with one email | Half a turn of multiple or more |
| One acquisition channel | Growth that stops if the channel shifts | Half a turn |
| Founder-fronted audience | Revenue that does not transfer at all | Discounted to near zero |
| Declining trailing twelve months | A trend, not a dip | Bottom of the range |
| Undocumented stack | Handover risk they cannot size | Priced cautiously |
| Under six months of history | No basis for a multiple at all | Asset value only |
That final row is worth stating plainly. A business with less than six months of trading cannot be valued on a clean multiple, and no amount of early traction changes that. Wait for six to twelve months of consistent data, or price on asset value at a discount.
Is the multiple itself ever the problem?
Sometimes, and usually because the founder applied a range belonging to a different asset type. Content sites run 1.5–3× trailing annual profit and tools run 1–2×, so a founder applying the micro-SaaS range of 2–4× to a single-feature utility will be disappointed by every offer they receive. Check you are using the convention for what you actually built rather than what it resembles.
The other version of this is a founder using multiples quoted for businesses ten times the size. Larger businesses attract higher multiples because they attract a different pool of buyers. Those figures do not travel downwards.
What can you do about it?
Two months of work on the right things moves the number more than any amount of negotiation. In rough order of return:
- Cut churn. It raises trailing profit and the multiple at the same time.
- Reduce concentration so no single customer or channel dominates.
- Take yourself out of daily operations and write down what you were doing.
- Strip costs that are genuinely optional, and leave the ones that are not.
- Rebuild the SDE calculation with evidence behind every add-back.
A founder who does that and comes back in six months with twelve clean trailing months is having a different conversation. The alternative is accepting that today's number is the honest one, which is sometimes the right call. A business that produces $28,000 of trailing annual profit is a good business and a real exit, and it is not a $150,000 one this year.
Related: how-much-is-my-saas-business-worth, how-buyers-value-customer-concentration, what-buyers-check-before-making-an-offer
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