How to Bridge the Valuation Gap and Still Get the Deal Done The disconnect between expectation and reality We make a lot of acquisition offers, and one of the most consistent themes we encounter is the gap between what a business owner believes their company is worth and what a credible buyer can justify paying for it. This is rarely because either side is acting irrationally. The seller has often spent twenty or thirty years building the company, taking personal risk, employing people, developing customer relationships and reinvesting profits. The buyer, however, is looking at the business through a different lens: maintainable earnings, future cash flow, concentration risk, management depth, capital expenditure, working capital requirements and the probability that those earnings will continue after the owner leaves. Current market research shows that this valuation gap is widespread. Dealsuite's UK & Ireland M&A Monitor reported an average SME EBITDA multiple of approximately 5.4x across sectors, but the headline average masks a significant size effect. Businesses producing around £200,000 of EBITDA were reported at roughly 3.6x, while businesses producing around £10 million of EBITDA attracted substantially higher multiples of around 8.2x. The same research found seller valuation expectations were considered too high in a significant proportion of transaction processes, illustrating why apparently attractive deals can stall before they ever reach due diligence. The problem is often compounded by the way business sales are reported. Owners read about a large corporate acquisition completed at ten or twelve times EBITDA and understandably wonder why their own company should be valued at four or five times. What is frequently missing from that comparison is scale, liquidity, management infrastructure, recurring revenue, diversification, intellectual property, growth and the degree of owner dependence. Two companies can each generate £1 million of EBITDA and still represent completely different investments. A company with a strong management team, contracted recurring revenues and diversified customers can continue producing earnings without its shareholder. A company where the owner remains the principal salesperson, manages pricing and holds the major customer relationships carries materially greater succession risk.

One of the things I have noticed from mentoring people in M&A is the natural temptation to try to improve the process before they have actually mastered it. I understand why. People want to move faster and be more efficient, and they quite rightly want to find better ways of doing things. Someone discovers a new company directory that can produce thousands of businesses at the click of a button, another person thinks email will be quicker and cheaper than letters, while someone else decides to widen the search criteria because a larger target list should theoretically produce more opportunities. Individually, all of these decisions can sound perfectly logical. The problem is that a good M&A origination process isn’t designed simply to maximise the number of companies you can identify or contact. It is designed to maximise the probability of finding businesses that you could realistically acquire. There is a significant difference between being busy and making progress, and in M&A the two can easily be confused. The process we teach hasn’t been created theoretically. It has developed through years of actually doing deals, testing different approaches, seeing what works, seeing what doesn’t work and continually refining the methodology. That doesn’t mean it is perfect or that it should never change. I am always interested in finding better ways of doing things. However, there is an important difference between improving a process because you have evidence that something works better and changing it because another approach appears easier, quicker or cheaper. Company sourcing is a good example. Someone may discover a directory that allows them to download thousands of company names and understandably wonder why they should spend significantly more time researching companies through a platform such as Endole. The answer is that we aren’t simply looking for company names. We are trying to identify businesses with a particular combination of characteristics that makes them suitable acquisition targets.