How Company Valuation Works

A valuation is a range, not a number

Most owners who ask for a valuation expect one figure. In practice three methods applied to the same company will produce three different results, and all of them can be correct. The job of a valuation is not to collapse those results into one number but to explain what sets the bottom and the top of the range.

What works at the negotiating table is not the figure itself but the reasoning behind it. A valuation without reasoning collapses at the first objection.

Three methods, three different questions

The multiple method asks: what has the market paid for comparable companies? It is fast, easily understood, and most buyers reach for it first. Its weakness is that the definition of 'comparable' is usually contestable.

Discounted cash flow asks: how much cash will this business generate in future, and what is that worth today? It goes deeper but is sensitive to assumptions; move the growth rate by two points and the answer changes materially.

The asset approach asks: what would this company's holdings fetch if sold individually? It is meaningful for asset-heavy or discontinued operations and says almost nothing about a growing service business.

The real argument is over adjusted EBITDA

What exactly does the multiple get applied to? Not the EBITDA in the income statement, but normalised EBITDA. Normalisation means stripping out what will not repeat: a one-off litigation gain, above- or below-market rent paid to a shareholder, personal costs carried by the company, a spike specific to one year.

The adjustment cuts both ways. A seller resists restating an owner's under-market salary to a market level; a buyer wants to see what new management will actually cost. In most transactions the price argument is really an argument about these line items.

The multiple is set by risk distribution, not by sector

Two companies in the same sector change hands at very different multiples. The difference usually comes down to this: how much of the revenue is contracted, how concentrated the customer base is, how dependent the business is on the owner's personal relationships, whether there is a second tier of management, and whether the financial reporting is audited.

Each of these is a risk for the buyer, and each risk comes off the multiple. The cheapest way to raise a valuation is not to look for a different formula but to remove several of these risks before the sale process begins.

Valuation and price are not the same thing

Valuation is an analytical result; price is the outcome of a negotiation. The gap between them is set by how the process is built: how many buyers are at the table, what their strategic motivation is, whether the seller is under time pressure, whether payment is upfront or deferred, and how much is tied to an earn-out.

That is why a valuation report is the start of a process, not the end of one. Used properly it tells you which buyer to approach with which argument, and where to stop.

Frequently asked questions