Valuation Is Not Just a Number

Few subjects in corporate finance generate more disagreement than valuation.

Founders often begin with a number they believe reflects what they have built. Investors approach the same company through return expectations, comparable transactions and risk. Lenders may care less about theoretical enterprise value and more about cash generation, asset coverage and downside protection.

All three can look at the same business and reach very different conclusions.

This is because valuation is not simply the result of applying a multiple or building a discounted cash flow model. It is the point where financial performance, expectations, risk, market conditions and negotiating leverage meet.

A valuation may be mathematically defensible and still be commercially unrealistic.

The number depends on what is being valued

The first source of confusion is often conceptual.

When someone says that a company is “worth €50 million”, what does that actually mean?

Is €50 million the enterprise value of the operating business? Is it the equity value attributable to shareholders after debt and cash? Is the number based on 100% of the company or a minority stake? Does it assume that existing shareholders retain part of the business?

These distinctions are not technicalities.

A company with an enterprise value of €50 million and €15 million of net debt does not necessarily deliver €50 million to its shareholders in a sale. The starting equity value may instead be substantially lower, subject to the final transaction mechanics.

Before discussing whether a valuation is high or low, the parties need to agree on what the number actually represents.

Multiples are useful, but they are not explanations

A common approach is to value a company by applying a multiple to EBITDA, revenue or another financial metric.

A business generating €5 million of EBITDA at an 8x multiple produces an enterprise value of €40 million.

The arithmetic is simple.

The difficult question is why the multiple should be 8x.

Why not 6x? Why not 10x?

The answer depends on the quality of the business behind the EBITDA.

Growth rate matters. Recurring revenue matters. Margins matter. Customer concentration matters. Capital intensity matters. Management dependency matters. Geographic exposure, cyclicality and competitive position all matter.

Two companies with identical EBITDA can therefore deserve materially different valuations.

The multiple is the conclusion of an analysis, not a substitute for one.

EBITDA itself may be negotiable

Even before discussing the multiple, the parties may disagree about the earnings to which it should be applied.

Management may present an adjusted EBITDA that removes exceptional costs, restructuring expenses, one-off legal fees or other non-recurring items.

Some adjustments may be entirely reasonable.

Others may be more optimistic.

If a company has incurred “one-off” consulting costs every year for the last four years, the buyer may reasonably question whether they are truly exceptional. The same applies to recurring founder expenses, under-market management salaries or projected synergies that have not yet been realised.

This is why valuation discussions often become less about the headline multiple and more about the quality of the underlying earnings.

A buyer offering 9x on €4 million of sustainable EBITDA may be valuing the company more conservatively than a seller asking 7x on €6 million of aggressively adjusted EBITDA.

The multiple cannot be separated from the number beneath it.

Growth is valuable when it is credible

Future growth can justify a premium valuation, but only when the market believes it.

A company growing revenues by 25% annually with contracted customers, visible capacity and stable margins presents a very different case from one projecting the same growth because management believes the market opportunity is large.

Investors will ask what supports the forecast.

Are new contracts signed? Has production capacity already been installed? Is the sales pipeline measurable? Has the company entered the new market before? What investment is required to achieve the projected growth?

The more speculative the growth, the greater the discount a buyer or investor is likely to apply.

This is one of the central tensions in valuation.

The seller naturally wants to be paid for tomorrow's potential. The buyer naturally wants to avoid paying today for value that it will have to create itself after closing.

The final valuation often reflects where the parties compromise between those two positions.

Risk changes value

Valuation is also an expression of risk.

A company with one customer representing 50% of revenues may be profitable, growing and well managed, but the concentration risk can reduce the price an investor is willing to pay.

The same may happen where the business depends on one regulatory licence, one founder, one supplier or one proprietary technology whose ownership is uncertain.

These issues can affect valuation in several ways.

The investor may apply a lower multiple. It may require part of the consideration to be deferred. It may introduce an earn-out. It may require stronger warranties or indemnities. It may simply decide not to proceed.

This is why improving a company's valuation is not only about increasing EBITDA.

Reducing concentration, professionalising management, improving reporting, strengthening governance and resolving legal uncertainty can all increase value because they reduce the risk attached to future cash flows.

The market sets a boundary

Management may have a carefully prepared valuation model showing that the company is worth €80 million.

If comparable businesses are currently trading or being acquired at valuations implying €50 million, the market will be difficult to ignore.

Comparable companies and precedent transactions are imperfect. No two businesses are identical, and transaction circumstances differ.

But they establish a reference point.

Capital providers operate in an opportunity set. An investor considering one company is usually comparing it with other possible uses of capital.

If similar businesses offer comparable growth and risk at significantly lower valuations, the premium needs to be explained.

This is why valuation is always partly relative.

A business is not valued in isolation from the market in which the capital provider can invest elsewhere.

Transaction structure can bridge a valuation gap

Buyer and seller do not always need to agree on one number immediately.

Suppose the seller believes the company is worth €60 million because a new division will significantly increase earnings. The buyer values the current business at €50 million but accepts that the upside may materialise.

An earn-out could bridge part of the difference.

Alternatively, the seller may retain equity, receiving part of the value today and participating in future upside.

Deferred consideration, rollover equity and other structures can serve a similar purpose.

These mechanisms do not eliminate disagreement. They convert part of the disagreement into a future economic test.

That can be useful when the valuation gap is driven by genuinely different views about future performance rather than fundamentally incompatible expectations.

The highest valuation is not always the best transaction

This is particularly important when comparing competing offers.

Buyer A values a company at €70 million but requires a substantial earn-out, financing condition and prolonged diligence.

Buyer B offers €65 million in cash, fully funded, with limited conditionality and a shorter execution timetable.

Which offer is better?

The answer cannot be derived from valuation alone.

The seller should consider certainty of proceeds, timing, conditions, financing risk, post-closing exposure and probability of completion.

A headline valuation is only one component of transaction value.

The same principle applies in fundraising. An investor offering the highest valuation may also demand governance rights, liquidation preferences or other terms that materially change the economics for existing shareholders.

A strong adviser therefore evaluates the whole transaction, not simply the number at the top of the term sheet.

Valuation has to survive the market

Founders are understandably attached to the value they believe they have created.

Investors are equally understandably focused on the return they expect to generate from the capital they deploy.

The adviser's role is not to choose one side.

It is to build a valuation case that can withstand scrutiny.

That means understanding sustainable earnings, growth, risk, market benchmarks, capital structure and transaction terms. It also means recognising when expectations have moved beyond what the market is likely to support.

Valuation is therefore not a single number produced by a model.

It is an argument about value.

And the strongest valuation is not the one that looks best in a spreadsheet.

It is the one that another party is prepared to accept, finance and ultimately close.