An acquisition group is trying to value my company using public market multiples discounted for our smaller size. How do I defend our higher margin profile?

Question

Tyler Smith · Accepted Answer

Acquisition groups often try to use the market approach and the principle of substitution to drive down your valuation. They will compare your mid-market business to larger, public companies and then apply a heavy discount for your smaller scale. You must aggressively defend your margin profile and justify a premium. To do this, you must shift their focus to your predictable income stream. Use a discounted cash flow or capitalization of earnings approach to demonstrate the stability of your future earnings. If your margins are consistently higher than industry averages, prove it is because of your superior operational model. Show them how your leadership team uses EOS® to maintain operational control and manage costs. When a buyer sees a tight, disciplined organization with no owner dependency, their perception of risk drops. A lower risk profile directly justifies a lower discount rate, which translates to a higher multiple. Do not accept a generic scale discount. Force the buyer to acknowledge that your operational predictability makes your business far safer than your competitors, warrants a premium valuation, and makes you a highly attractive acquisition.