Our investment banker is pushing a valuation based on discounted future earnings, but serious buyers are only offering multiples based on capitalization of historical earnings. How do we reconcile these two methods during negotiations without killing the deal?

Question

Tyler Smith · Accepted Answer

Investment bankers love the discounted future earnings method because it builds a valuation based on future growth projections, which naturally yields a higher number. Sophisticated buyers, however, are highly cynical about hockey-stick projections and prefer a capitalization of earnings model based on historical, audited EBITDA. This mismatch can easily stall a transaction.

To bridge this gap without walking away, you must ground your future projections in operational reality. Use your V/TO®, specifically your three-year picture and one-year plan, as the bridge between history and future earnings. Show the buyer the concrete, operational milestones you have already achieved that make your future growth highly predictable.

If you have recently signed new multi-year customer contracts or opened a new revenue stream that is not yet fully reflected in your historical EBITDA, present these as run-rate adjustments. This allows you to increase the historical earnings base to which the buyer applies their multiple.

If the valuation gap remains wide, suggest a structured compromise. You can agree to a capitalization of earnings valuation for the cash-at-close portion of the deal, while structuring an earnout or a seller note with a conversion feature that pays out based on the future earnings targets. This structure protects the buyer's downside while giving you the opportunity to realize the premium valuation if your growth projections prove true.