Hi, I’m Chris Walton, author of this guide and CEO of Eton Venture Services.
I’ve spent much of my career working as a corporate transactional lawyer at Gunderson Dettmer, becoming an expert in tax law & venture financing. Since starting Eton, my team and I have completed thousands of valuations for M&A teams, startups, and individuals.
Read my full bio here.
To secure the highest possible valuation in M&A, your business valuation process needs to combine an analysis of hard accounting data and a compelling narrative.
Making a strong case during negotiations for more favorable valuation comparables—an argument that often relies on intangibles like goodwill, intellectual property, client relationships, and growth potential—is more of an art than a science.
The majority of the article will discuss this art of M&A valuations—how intangibles and goodwill should be used to drive negotiations and due diligence.
But first, let’s start with the three fundamental M&A valuation methods everyone needs to know.
Need a reliable M&A valuation partner? Eton Venture Services covers all aspects of valuations, from M&A valuations and transaction opinions to goodwill impairment testing. |
Mergers and acquisitions (M&A) valuation is the process of determining the value of a company or its assets when it’s involved in a merger or acquisition. It’s a key step in the due diligence process, and helps both parties understand the worth of the business.
At its core, M&A valuation answers the essential question: What is this business worth, and why?
However, the answer is rarely straightforward. Value is not a fixed figure but a dynamic concept shaped by factors such as market conditions, the strategic motivations of buyers, and the unique characteristics of the target company.
As we’ll show, M&A requires a blend of valuation methods to arrive at a well-rounded figure.
Most finance professionals and business directors will already be well aware of the fundamental three techniques used in an M&A valuation, so we’ll quickly cover them only briefly before jumping into the “art” of business valuation.
The “market approach” valuation method compares your company to other comparable businesses that have been recently bought or sold.
This method works best when there is enough data on companies of similar size, industry, and revenue, making it relatively simple to establish a company’s value based on market trends.
By conducting Comparable Company Analysis (CCA) and Precedent Transactions Analysis, you can identify companies with higher valuations and build a case for why your company deserves the same or better.
Example: Calculating an M&A valuation with the market approach
Let’s value a software company with $10M EBITDA.
Comparable Companies:
Precedent Transactions:
Keep reading to see why your narrative around which comparables to use matters most for your valuation.
Pros | Cons |
Uses real-world data for comparisons making your argument for a particular valuation more simple. | Limited by availability of comparable data. |
Reflects current market conditions. | Can be affected by temporary market fluctuations. |
Straightforward for industries with plenty of comparable transactions. | Hard to find exact comparables—close comparables may not account for unique aspects of a company. |
The “income approach” valuation method focuses on a company’s future income potential. A common M&A valuation method is Discounted Cash Flow (DCF) analysis, which estimates future cash flows and discounts them to present value.
This is ideal for companies with steady growth and predictable revenue streams.
Example: Calculating an M&A valuation with the income approach
Company’s projected cash flows:
Using a 10% discount rate:
Total value = $185M
Pros | Cons |
Captures future earning potential. | Relies on forecasting future cash flows, which can be difficult due to assumptions about growth rates, market conditions, and discount rates. |
Effective for companies with steady growth. | Sensitive to inaccuracies in future projections. |
Focuses on long-term value. | Less reliable for businesses with volatile revenue (e.g. hyper-growth) |
Applicable and usable for every business type. | Doesn’t tell the full story of value. The business may have significant value because of other things, like employee expertise, patents, etc. which make it hard for competition to enter the market. |
The “cost approach” valuation method assesses the value of a company’s assets by determining the cost to rebuild or replace them, minus liabilities.
It’s effective for asset-heavy industries like manufacturing or real estate, using M&A valuation methods like Asset-Based Valuation and the Adjusted Net Asset Method.
While not often used for service-based businesses, this approach is useful when physical assets play a key role in a company’s value.
Example: Calculating an M&A valuation with the cost approach
Company’s assets:
Less liabilities:
Net replacement cost = $53M
Pros | Cons |
Ideal for asset-heavy industries. | Ignores future income potential. |
Provides a clear and objective basis for valuing physical assets. | Less useful for service or tech-based businesses. |
Simple for calculating physical asset value. | Often fails to capture intangible assets or market position. |
Financials matter, but they’re just one part of a strong valuation in M&A.
To get the valuation you deserve in an M&A deal, you also need to tell a compelling story about those aspects of the business that you know make it even more valuable than its current revenue figures suggest.
Let’s say two companies have the same revenue. One sells for twice its revenue (a 2x multiple), and the other for five times (a 5x multiple).
Why the difference? The answer lies in how well the company’s advisors tell its story and make the case for higher comparables. This makes it critical that you have an expert M&A valuation firm on your side—one who can tease out what makes your company more attractive for an acquisition.
A big part of this comes down to intangible assets and goodwill, and the distinction between them plays a critical role here.
While intangible assets are identifiable and can be valued individually—such as patents, trademarks, customer relationships, and brand recognition—goodwill encompasses the non-quantifiable premium a buyer is willing to pay for the future potential of the business, including factors like reputation, loyal customers, and market positioning.
These factors don’t always show up in financial statements, but they can be the secret sauce that pushes a valuation higher.
Take patents, for example. A company might have several patents that protect its unique products or processes. Even if those patents haven’t yet generated significant revenue, their potential future earnings make them valuable.
A strong IP portfolio can turn a mid-tier company into an attractive acquisition target, especially if those patents can lock out competitors.
Similarly, a well-known brand can generate customer loyalty, which translates into steady revenue and pricing power – two factors that buyers love.
“A common oversight is underestimating the value of brand recognition and intellectual property. Often, people focus on tangible assets like equipment and real estate, while intangible assets such as patents, trademarks, and customer relationships can be equally or more valuable. These assets contribute significantly to a company’s earning potential but can be challenging to quantify accurately. It’s crucial to conduct thorough due diligence, involving expert valuation of these intangibles, to avoid underestimating their impact on the overall valuation.” – Gary Hemming, Commercial Lending Director, ABC Finance Limited
Unlike goodwill, these intangible assets are more straightforward to quantify and are typically recorded when acquired.
Goodwill reflects the premium buyers are willing to pay beyond the fair value of the company’s identifiable assets, both tangible and intangible. It represents non-separable factors such as reputation, loyal customers, brand strength, and market leadership.
For example, customer loyalty contributes significantly to goodwill. While customer relationships can sometimes be valued as a distinct intangible asset, especially in the case of long-term contracts, the broader reputation and perceived future earnings from customer loyalty often fall under goodwill.
Buyers might be willing to pay a premium because they believe that these relationships will lead to continued success, even though the exact value of these relationships can be difficult to isolate.
A control premium refers to the extra amount a buyer is willing to pay to acquire a controlling interest in a company, typically more than 50% of its shares. The premium reflects the value of having full control over the company’s strategy, operations, and cash flows, rather than merely a say in how the business is run.
This full control allows the buyer to make significant changes, such as altering strategy, driving acquisitions, or implementing digital transformations, which they believe will create additional value.
The challenge lies in determining where this value is generated. For instance, if a company’s management is in one location but the execution happens elsewhere, deciding how to allocate profits can get complicated.
Having a unique or well-established client base is another way to boost a company’s valuation. For example, if you’re selling a company with a long-term contract with a major corporation, that relationship is often classified as an intangible asset that can be individually valued.
However, the broader context of customer loyalty and the company’s reputation in its industry might contribute to goodwill. These factors are harder to quantify as separate assets but are crucial when buyers assess the long-term growth potential of the company.
A prime example is Microsoft’s acquisition of LinkedIn, where Microsoft gained not just a professional network but also valuable data insights for talent recruitment, positioning itself for future growth.
According to Dr. Larry Little, founder of the Eagle Center of Leadership, “culture is incredibly important and often overlooked in mergers and acquisitions.” It often plays a role in goodwill—particularly when the acquirer sees value in the leadership style, employee engagement, or company ethos that can’t be captured through financial metrics alone.
Often, disparities in company cultures can lead to resistance, disengagement, and ultimately failure.
A prominent example is AOL’s merger with Time Warner in 2000, where the clash between AOL’s fast-paced, tech-focused culture and Time Warner’s traditional media approach created serious challenges. This highlights the importance of considering leadership styles and organizational values to maximize benefits in any merger.
Barriers to entry make it difficult for competitors to replicate your business. Whether it’s proprietary technology, significant capital investments, or exclusive supplier relationships, these barriers make your company more attractive to buyers.
Amazon’s acquisition of Whole Foods demonstrates this. Whole Foods had a network of premium stores in prime locations, while Amazon brought advanced logistics and a massive online customer base.
Together, they created a powerful synergy—offering faster delivery, seamless online ordering, and efficient inventory management. For competitors to match this, they would need significant investments in both tech infrastructure and a high-end retail presence, raising the barriers to entry.
Barriers like these can be separately identified and valued, but the synergy they create can also enhance goodwill by positioning the company for future success in the market.
Synergies also play a significant role in M&A valuations. When two companies merge, the potential for operational efficiencies, cost savings, or revenue enhancements can significantly impact the valuation.
For instance, if one company has a robust distribution network and the other has a unique product line, the combined entity might achieve greater profitability by leveraging each other’s strengths.
Buyers often factor in these potential synergies to justify paying a premium, believing that the merger will create more value than the sum of its parts.
These synergies may stem from both intangible assets, like a strong product portfolio, and goodwill, such as reputation or market positioning.
The quality of a company’s management team is another intangible asset that can affect its valuation. Effective leaders with a track record of successful decisions can inspire confidence in potential buyers.
A company with a visionary management team is likely to command a higher price. Johnson & Johnson’s acquisition of Actelion benefited from this, as the integration of Actelion’s R&D capabilities strengthened Johnson & Johnson’s market position and delivered enhanced healthcare solutions.
Goodwill may also be influenced by the buyer’s perception of management. A visionary team capable of driving growth or maintaining market leadership can contribute to the premium paid over identifiable assets.
A company’s market position reflects how well it performs relative to its competitors. A business with a strong market position often benefits from pricing power, higher margins, and customer loyalty, all of which contribute to its attractiveness to potential buyers.
Buyers are more willing to pay for companies that dominate their industry, as this leadership suggests lower risks and more stable, predictable returns.
Growth potential is often a key driver of valuation, especially in industries where innovation and expansion opportunities are prevalent.
Companies that demonstrate a clear path for future growth – whether through new market opportunities, product development, or strategic partnerships – are more attractive to buyers.
Patents increase valuations because they provide exclusive rights to innovations, which can drive future revenue and give a competitive edge in the market.
However, as Arsalan Ahmed, Strategy & Business Development Manager, Ecovyst, noted when we interviewed him for this piece, there is nuance to including patents in your case for a sale price:
“For instance, in a technology acquisition, initial valuations heavily emphasized patents and historical financials. However, further due diligence revealed that the competitive edge of those patents was eroding due to rapid technological advancements. Without assessing the lifecycle of these assets and their relevance in the evolving market, the valuation would have been inflated, leading to overpayment.”
It’s therefore important to incorporate both historical performance and forward-looking elements in your valuation of all your intangible assets.
The real art of M&A valuation lies in turning qualitative factors into quantitative ones. This is where valuation experts come in. Their job is to take intangible factors like intellectual property, strong customer relationships, and barriers to entry and translate them into numbers that potential buyers can understand.
“The role of a valuation expert is to turn these qualitative factors that contribute to a company’s value into quantitative ones. We put forth an argument that explains why they are high-value assets and should be included in the overall valuation price.” – Chris, Founder at Eton
At Eton, we take a structured yet flexible approach to this process. One simple method we start with is asking clients to provide us with eight bullet points outlining their key achievements and challenges. These insights help us assess the company’s overall trajectory
For example, if the challenges are significant, we might argue that the company is facing headwinds, which lowers our projection of future value and, in turn, reduces the valuation multiple.
On the other hand, if the achievements are substantial, we emphasize these successes to illustrate the company’s growth potential. This could lead to a more optimistic valuation, reflecting the positive trajectory and market opportunities ahead.
The goal is to craft a well-supported argument that explains why these intangible assets should be included in the overall valuation. In other words, it’s about showing buyers the hidden value that might not be immediately obvious from the financials alone.
One of the best ways to boost valuation is by using creative comparables. Valuation experts often search for deals that might seem like a stretch at first glance but can be used to argue for a higher valuation.
For example, let’s say you’re selling a company that generates $10M in annual revenue. A recent acquisition in your industry valued a similar company at three times its revenue. However, there was another acquisition of a different company that sold for five times revenue.
Even though that company might not seem like a perfect match at first, your valuation experts will try to find ways to draw comparisons, arguing that your business has similar growth potential.
“It’s a narrative game. It’s similar to common law tradition. The law doesn’t change, but you need to convince a judge that your set of circumstances and facts fits that law over there in a way the judge just hasn’t previously seen. Often valuations in M&A are more of an art than science because of this.”—Chris, Founder at Eton
This “narrative game” is what often sets M&A valuations apart. It’s about finding ways to make the best possible case for a higher valuation, using a combination of data and creativity.
Valuing private companies in M&A transactions comes with unique challenges due to the varying quality and completeness of their financial data. Unlike public companies, which must adhere to strict reporting standards like GAAP or IFRS, private companies often provide less standardized financial statements. This lack of transparency requires a more nuanced approach to valuation.
Typically, earnings multiples or discounted cash flow models are used for private company valuations. However, these M&A valuation methods often need adjustments to normalize financials, accounting for non-recurring expenses and different accounting practices.
In cases where financial data is incomplete, qualitative factors – such as management strength, customer concentration, and market position – become crucial. For instance, a family-owned business with stable, long-term contracts may hold greater value than a public company with less secure relationships.
While obtaining financial data from private companies is possible – especially during acquisitions or formal valuations – accurately interpreting and adjusting this data is essential for a complete understanding of the company’s true worth.
Public companies disclose detailed financial statements, providing a clearer picture of their financial health and simplifying valuation through standardized data.
Conversely, private companies have more flexibility in reporting, leading to less comprehensive financial data. Buyers must conduct thorough due diligence to accurately assess a private company’s worth, often requiring adjustments to normalize financials.
Public companies benefit from real-time market data that reflects market sentiment, making Comparable Company Analysis effective. In contrast, private companies lack this liquidity, leading to a more subjective valuation process based on their unique narratives.
Public companies generally have lower costs of capital due to easier access to financing, which is reflected in their DCF analyses. Private companies face higher capital costs and perceived risks, resulting in elevated discount rates that lower their valuations.
Private companies often experience a “marketability discount,” as their shares are harder to sell compared to public companies. This difficulty contributes to lower valuations, while the ease of trading shares in public markets enhances their valuations.
Now, you might wonder: How can acquirers accurately price assets when future outcomes are highly uncertain? That’s where scenario and sensitivity analyses come in.
Scenario analysis helps evaluate the expected value of a proposed acquisition or investment by creating various possible future scenarios. This helps in assessing whether a particular outcome is likely to occur.
For instance, in evaluating a target company’s growth potential, an acquirer may construct multiple cases—best, worst, and baseline—all based on assumptions about market conditions, competitive pressures, or operational efficiencies.
The key benefit is that this approach goes beyond static forecasts, allowing stakeholders to understand the full range of risks and opportunities. In M&A deals, this understanding can help acquirers price assets more accurately, especially when future outcomes are highly uncertain.
Sensitivity analysis, a related technique, highlights the most critical assumptions affecting the valuation. For example, small changes in projected revenue growth or cost synergies can have an outsized effect on the deal’s overall worth.
Of course, the effectiveness of these analyses relies heavily on the underlying M&A valuation models used, but they can ultimately inform acquisition structuring and strategic decisions, enhancing the likelihood of successful investment outcomes.
Understanding M&A valuation goes far beyond the numbers, requiring a balance between data-driven approaches and the strategic narrative behind intangible assets and goodwill. This is where firms like Eton make a difference.
Our M&A valuation services specialize in uncovering and maximizing the hidden value in M&A deals by seamlessly integrating quantitative methods with qualitative insights. We don’t just calculate value – we craft a persuasive case for why your business deserves top-dollar consideration.
Our services also include:
Our aim is to bring clarity, strategy, and a compelling narrative to every deal.
Comparable Companies Analysis (CCA) is an M&A valuation method that compares a company to similar businesses using metrics like revenue, EBITDA, and earnings multiples. It reflects real-world data and market conditions, making it useful in industries with many comparable transactions. However, its accuracy depends on finding truly comparable companies and can overlook unique business strengths, while also being affected by short-term market fluctuations.
The Discounted Cash Flow (DCF) is an M&A valuation technique that estimates a company’s value based on projected future cash flows, discounted to present value. It offers a long-term view of value and is especially effective for companies with steady growth, as it captures future earning potential. However, DCF relies heavily on assumptions, making it complex and highly sensitive to inaccuracies in projections. This can make it less reliable for businesses with volatile revenues or uncertain growth prospects.
Intangible assets are critical in M&A valuation and can significantly impact a company’s price. These include things like intellectual property, brand reputation, and customer relationships – elements that might not show up directly in financial statements but contribute greatly to value. Recognizing and effectively communicating the value of these intangibles is key when employing various M&A valuation techniques.
Preparing for an M&A valuation involves several best practices. Start by gathering multiple years of financial statements and reviewing audits to get a clear picture of the company’s performance. Utilize industry benchmarks to gauge financial health against peers. Expand your set of comparables beyond immediate competitors to include relevant transactions that can inform valuation. Consider liquidity discounts when comparing private and public companies. Use conservative risk premiums in DCF models and analyze multiple cash flow scenarios for a comprehensive view. Finally, being ready to negotiate favorable terms can help close deals successfully.
Schedule a free consultation meeting to discuss your valuation needs.
Chris co-founded Eton Venture Services in 2010 to provide mission-critical valuations to venture-based companies. He works closely with each client’s leadership team, board of directors, internal / external counsel, and independent auditor to develop detailed financial models and create accurate, audit-proof valuations.
