I'd pay more for a business doing $500k in revenue with $250k profit (50% margins) than a business doing $1M in revenue with $100k in profit (10% margins).
Double the 500k R / 250k P company without more expenses, and you now have 1 M R / 750k P. Double the 1M R / 100k P and you now have 2 M R / 1.1 M P.
Especially if a firm can come in and do a round of layoffs (Replace support with outsourced, fire marketing, replace devs with outsourced).. it would be pretty easy to get the margin really really high for a few years, which is all they may be looking for.
I wish there were a standard assumption that if a business is profitable, then we use profit instead of revenue, and (crucially) use a much larger multiplier. It feels like I'm always having to remind folks that revenue ≠ profit, and that normal guidelines (we invest in companies with $X00,000 revenues) might need to be adjusted for smaller, breakeven or profitable businesses.
For what it's worth, the company I work for currently just got sold off for $4.4bn USD by our parent company. Based on quarterly filings, that equated to about 2x annual revenue and 9-10x EBITDA for last year (not sure what the multiple was for net).
