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Business Valuation: Theoretical vs. Real World

Theoretical business valuations often differ significantly from the valuations real world buyers are willing to pay.

As investment bankers with decades of experience, we have seen many business owners struggle to understand the true value of their company. They often rely on formal valuations they paid a lot of money to have prepared, or they use earnings multiples that were mentioned at the country club. It’s great that business owners are thinking about valuation, but these valuations can be far removed from the actual value a company can fetch in a real-world transaction.

Theoretical Business Valuations

Theoretical valuations, such as discounted cash flow (DCF) analysis, book value, or liquidation value, are based on assumptions about the future performance of a company or the net proceeds from the sale of its assets and satisfaction of its debts. They are useful for providing a baseline for value, but they do not take into consideration many real-world variables.

Real-world variables that can significantly impact valuations include market conditions, competition, the unique opportunities and risks of each company, and the strategic reasons a buyer might have for acquiring a company at a premium valuation.

Market Multiples Methodology

The one theoretical methodology that gets closer to actual real-world valuations is the market multiples methodology.

ALL strategic and financial buyers of lower middle market companies use a market multiples methodology to value companies that are profitable. They may adjust the market multiples valuation up or down based on various factors specific to the company, but they always start with this methodology.

Because it is the methodology used by all buyers and uses data from actual acquisition transactions that have been completed, the market multiples methodology provides a more practical and accurate valuation of a company than the other theoretical valuation methodologies.


When we discuss valuation with company owners, our initial assessment of valuation is typically based on a range of multiples of adjusted EBITDA. That multiple is derived from:

  • An analysis of comparable transactions in the market,

  • Our industry experience, and

  • Our conversations with financial and strategic buyers from across the country.

But when we give our estimate of valuation to business owners, we are always careful to point out that even though our approach is based on similar real-world transactions, we won’t know the true value of the company until we take it to market.

Why do Valuations Paid by Buyers Differ From Theoretical Valuations?

One might wonder why actual valuations paid by buyers differ from theoretical valuations, especially when all buyers start with a market multiple methodology. The answer can be boiled down to two factors: 1) M&A sale process, and 2) Buyer motivations.

M&A Sale Process

As investment bankers, our job at Waypoint Private Capital is to manage the M&A sale process, creating a market for the company by maximizing the number of potential buyers evaluating the sale opportunity. When we are engaged in the sale process, all buyers know they are competing with other buyers to make the acquisition, and they know they must put their best offer forward to be successful. This simple but important element of the process is what allows us to secure the highest possible valuation for the company.

Buyer Motivations

Buyer motivations are the second factor causing a divergence from theoretical valuations. We can try to figure out the motivations of potential buyers during early conversations, but it is impossible for us to truly know those motivations until after the sale is complete.

However, during the M&A sale process we don’t reveal to any of the potential buyers what the seller’s valuation expectations are, or what other potential buyers have bid for the company. This approach leaves the door open to receiving some surprisingly high valuations. After all, it just takes one outlier from a group of potential buyers to get a premium valuation for a company.

Following are two examples of real-world transactions:

Example 1: Waypoint was hired to provide a valuation for a division of a credit union, using both discounted cash flow and market multiples-based approaches. The valuation estimate came out to approximately 5 times adjusted EBITDA. When the company was sold soon thereafter the buyer paid 20 times EBITDA to acquire the company - 300% more than valuation methodologies suggested they should. Why? Because they had been unsuccessfully trying to acquire a company in the industry for years, and strategically they needed this entry into the industry. So, they put forth an offer that ensured they were going to be the top bidder for the company.

Example 2: We had very strong interest in a company we were recently selling and received numerous offers to acquire the company. Most of the offers had valuations that were in line with what the market multiple methodology would suggest. Except the outlier. The outlier offer, which came from a very qualified buyer, was double that of the next highest offer. Why? The buyer knew they could substantially grow the company and quickly make up for a valuation that was higher than what theoretical valuation methodologies might suggest. They knew Waypoint was marketing the company to a large group of prospective buyers and didn’t want to risk putting forth an offer that wasn’t going to be the highest, so they offered a premium valuation and successfully acquired the company.

When it comes to understanding the true value of a company, it is important to consider both theoretical and market multiples valuation methodologies. However, theoretical valuations such as the DCF method never would have predicted the outcomes above.

A company is worth whatever a buyer is willing to pay for it, and there are often buyers who have a reason to pay a premium value for a company.

That valuation can only be discovered through a well-run M&A process being managed by an experienced investment banker.

Reach out to a team member if you are interested in learning more about the current value of your business, how you can increase the value of your business, or how the M&A sale process we use when selling a company ensures the seller will receive the maximum valuation buyers are willing to pay for their company.


About Waypoint Private Capital

We are an investment banking firm that provides lower middle-market clients the quality of

investment banking services typically available only to large companies. Waypoint helps privately-held business owners sell and buy companies, raise equity and debt capital for growth and recapitalization, and plan for a successful exit from their business.

To learn more visit or call us at 608.515.3354 or 918.633.2647 and speak with a Waypoint Private Capital expert.

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