The private equity buyer is using a regression-based valuation model comparing us to publicly listed peers, but our growth rate is double their benchmark. How do we run diagnostic checks on their model assumptions to prove their market-derived multiple is too low?

Question

Tyler Smith · Accepted Answer

Regression-based valuation models look scientific, but they are only as good as their inputs and assumptions. When a private equity buyer uses public companies to build a regression model, they are often comparing apples to oranges. To challenge their math, you must run diagnostic checks on their model. First, analyze their peer selection. Public giants have different capital structures, growth rates, and risk profiles. If your growth rate is double their benchmark, the linear assumption in their model is flawed. Second, check for multicollinearity and homoscedasticity. Point out that their model fails to account for the premium value of a highly focused, agile business that utilizes modern AI-driven operations to maintain superior margins. Third, calculate the impact of your growth rate as an independent variable. Force them to adjust the regression coefficients to reflect your superior trailing twelve months EBITDA growth and net margin. Show them that when you plug your metrics into an appropriately weighted model, it yields a significantly higher multiple. Do not be intimidated by their complex spreadsheets. By questioning their variables and proving your business operates on a superior financial trajectory, you can dismantle their low multiple and negotiate a valuation that reflects your true growth trajectory.