Can the same €1 million in profits command a higher valuation simply because it is earned by a larger company? The answer is more nuanced than a simple yes, and understanding why matters for executives, investors, and entrepreneurs alike.
Key Takeaways
- Size alone does not create value. What drives valuation is a company's ability to grow and generate returns above its cost of capital. Being large is a result of structural advantages, not a cause of them.
- Economies of scale improve returns. Larger companies spread fixed costs across a broader revenue base, improving margins and making capital work harder.
- Financial resilience lowers risk. Diversified revenues and stronger balance sheets reduce the risk premium demanded by investors, directly contributing to higher valuation multiples.
- Professionalization pays off. Structured processes and professional governance improve capital allocation and reduce dependency on key individuals.
- Size can also work against you. Bureaucracy and a declining capacity for innovation can erode the very advantages that justified a premium, meaning a focused smaller firm can sometimes deserve a higher multiple.
This article explores what's really behind the size premium and what it takes to get there.
