Our business has high operating margins due to our tech-enabled workflows, but comparable market transactions are based on traditional low-margin service businesses. How do we reconcile these approaches to defend our premium valuation?

Question

Tyler Smith · Accepted Answer

When your business operates at double the margin of your peers, relying on industry-average market multiples will severely undervalue your company. Buyers will try to anchor you to these standard multiples because they are favorable to them. To counter this, you must build an indisputable defense using the Income Approach, specifically the Capitalization of Earnings Method, alongside a refined Market Approach.

Use the Capitalization of Earnings Method to show that your normalized cash flow is highly stable and predictable because it is generated by systemized, automated processes rather than volatile manual labor. Calculate your custom capitalization rate to reflect the lower operational risk of your business.

To salvage the Market Approach, do not compare your company to traditional service providers. Instead, identify and use public comps or transaction datasets of tech-enabled services or software-as-a-service businesses that share your margin profile. This allows you to argue for a multiple premium based on margin regression.

In your discussions, use your Accountability Chart to prove that your lean structure is a permanent asset, not a temporary fluke. When you show that your high margins are locked in by automated systems and clear accountabilities, you force the buyer to abandon generic industry multiples and value your business based on its true cash-generating power.