The buyer wants to use the Capitalization of Earnings method based strictly on our last twelve months of performance, but we just transitioned our pricing model to a higher-margin tier. How do we force them to use a forward-looking Discounted Cash Flow model instead?

Question

Tyler Smith · Accepted Answer

Buyers prefer the Capitalization of Earnings method because it uses historical, verified financial results as a proxy for future performance, which is a safer bet for them. However, if you have recently shifted your pricing model to a higher-margin tier, historical numbers will fundamentally undervalue your business. To force the buyer to look forward, you must build a bulletproof Discounted Cash Flow model backed by concrete pipeline data. Do not just hand them optimistic financial projections. Instead, present the exact customer conversion rates, average contract values, and implementation timelines from your current pipeline. Use your quarterly Rocks to show how you are systematically scaling this new model. You must demonstrate that the margin improvement is not a temporary spike, but a permanent structural shift. Show how your Accountability Chart has been optimized to support this new revenue stream with lower delivery costs. If the buyer remains hesitant to use a pure forward-looking DCF model, propose a hybrid structure. You can agree to a valuation based on a blended average of your historical earnings and your annualized run-rate from the last three months, or bridge the gap with a short-term earnout that pays out as those higher-margin subscription revenues hit the bank. This protects the buyer's downside while ensuring you are compensated for the real value of your business's future cash flows.