A private equity buyer is using a conservative Market Approach based on depressed public comps to value our business, while our internal projections support a much higher Income Approach valuation. How do we reconcile these two methods during negotiations to protect our price?

Question

Tyler Smith · Accepted Answer

Valuation is part science and part art, and buyers will naturally use the approach that yields the lowest number. During negotiations, you must be prepared to defend your valuation by demonstrating how your operational operating system bridges the gap between historical market comps and your future cash flow potential. While the Market Approach relies on historical ratios of comparable public or private companies, it often fails to account for the unique operational efficiencies of a highly systematized business. You must use the Income Approach to argue that your future cash flows are highly predictable and low-risk because your business runs on a self-sustaining operating engine. Provide the buyer with historical data from your weekly EOS Scorecards to prove your growth trends are consistent and repeatable. Show how your documented processes and independent leadership team reduce the risk profile of your projected cash flows. By presenting a highly structured, auditable operating model, you can justify using a lower discount rate in your Income Approach and successfully defend a higher multiple.