Our company has high gross margins due to our proprietary tech, but a buyer is insisting on valuing us purely as an EBITDA multiple of our consulting division. How do we identify if a revenue-based multiple or a blended valuation model is more appropriate, and how do we negotiate this shift before signing the LOI?

Question

Tyler Smith · Accepted Answer

If you are running a software-enabled service business, accepting a traditional EBITDA multiple can result in a significant undervaluation. Buyers want to pay an EBITDA multiple because it is cheaper for them, but if your high gross margins are driven by proprietary automation rather than headcount, you deserve to be valued on your tech-enabled efficiency.

To negotiate this shift before the LOI is signed, you must analyze your revenue streams and align them with the correct valuation methodologies. Look at your service delivery costs. If your margins resemble a software company more than a consulting firm, you should push for a blended valuation model.

Segment your revenue into distinct categories: pure consulting and tech-enabled automation. Apply a premium revenue-based multiple to your automated revenue and a standard EBITDA multiple to your consulting division. Use your operational playbook and documented workflows to prove that your tech is doing the heavy lifting, which justifies the blended approach. Presenting your business this way during early discussions prevents the buyer from putting you in a transactional consulting box and ensures your valuation reflects your true operating leverage.