We want to use the Ankura regression-based valuation model to prove our premium value, but the buyer is ignoring our high return on equity and focusing solely on revenue growth. How do we negotiate the impact of capital efficiency on our enterprise value?

Question

Tyler Smith · Accepted Answer

Many buyers use simple revenue multiples because they are easy to calculate. However, this approach often ignores the true efficiency of your business. If your company demonstrates high profitability and a strong return on equity (ROE), it's crucial to challenge these simplistic growth metrics during negotiations.

Leveraging a Regression-Based Valuation Model

To effectively negotiate, you should:

• Utilize a regression-based valuation model: This quantitative approach helps you benchmark your financial metrics against public company data, often sourced from platforms like Capital IQ.
• Demonstrate capital efficiency: The model can show precisely how metrics like return on equity and profit margins influence enterprise value within your specific sector.
• Present mathematical proof: By plotting your capital efficiency against that of peer companies, you can mathematically prove that your business generates significantly more cash per dollar of capital than your competitors. This evidence provides a compelling argument for a higher valuation, even if your top-line growth appears moderate.

Negotiating Impact and Securing Value

When presenting this data to the buyer, emphasize the following points:

• Highlight cash conversion: Showcase that while your top-line growth rate might be moderate, your cash conversion cycle and asset productivity are exceptional.
• Reference IVS 105: Under the International Valuation Standards (IVS) 105 framework, superior capital efficiency indicates that your future cash flows are more secure and require less ongoing capital reinvestment. This can significantly increase your [business valuation multiples](/qa/what-moves-business-valuation-multiples).
• Align with long-term goals: Connect your high return on equity to your long-term vision, often expressed through a Vision/Traction Organizer (V/TO). Explain that this efficiency is a direct result of disciplined operational systems, not a temporary spike.
• Frame as structural strength: By positioning your capital efficiency as a core structural strength, you can successfully argue for a multiple that accurately reflects your business's superior cash generation capacity. This proactive approach can help mitigate [operational risks](/qa/identifying-operational-risks-before-buyer-due-diligence) that buyers might perceive.

This robust, data-driven negotiation strategy helps ensure your business is valued not just on growth, but on its fundamental financial health and operational excellence, potentially leading to a [synergistic premium](/qa/ivs-105-market-approach-strategic-premium).

Related questions

• [How do buyers actually value a business like mine beyond just a simple EBITDA multiple?](/qa/understanding-business-valuation-multiples-market-approach)
• [What moves business valuation multiples?](/qa/what-moves-business-valuation-multiples)
• [What are the hidden risks in my business operations that will cause a buyer to walk away or renegotiate the price during due diligence?](/qa/identifying-operational-risks-before-buyer-due-diligence)
• [The buyer is insisting on an earnout tied to EBITDA targets, but we want it tied to gross margin or customer retention metrics to avoid being penalized for their post-close corporate overhead decisions. How do we use our V/TO metrics to negotiate a cleaner earnout structure?](/qa/negotiating-clean-earnout-metrics-vto)