How do we identify our exact stage of development to justify combining absolute and relative valuation methods instead of a basic multiple?

Question

Tyler Smith · Accepted Answer

Buyers will often try to pigeonhole your business into a simple relative valuation multiple based on generic industry averages. To fight back, you must accurately identify your company's current stage of development to justify a mix of absolute and relative valuation methodologies. If you have moved past the volatile, founder-dependent startup phase and built a highly stable, systemized organization, a standard relative multiple does not capture your intrinsic value.

You need to combine the market approach with an absolute discounted cash flow model. Use your historical financial stability and clear growth forecasts to prove your future cash flows are predictable. Walk the buyer through your V/TO® to show your strategic plan is backed by a disciplined operational execution engine.

By demonstrating that your business operates on a self-sustaining system where decision-making is distributed across a capable leadership team, you prove that your cash flows are lower risk than those of your competitors. This allows you to negotiate a lower discount rate in your absolute valuation model, leading to a much higher enterprise value. Do not let the buyer use static, backward-looking multiples if your business has evolved into a highly systemized growth engine.