INSIGHT

Valuation for M&A: Understanding key methodologies that drive deal valuations 

Kemp Moyer • May 16, 2025

Services: Business Valuation

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Valuation serves as the backbone of any M&A transaction, helping parties determine the fair price for a potential deal. When approaching mergers and acquisitions, understanding the various valuation methods becomes crucial for making informed decisions, aligning expectations and deal strategy and negotiating effectively.  

3 fundamental valuation methods used in M&A transactions 

This article explores the key valuation methodologies used in M&A transactions, their applications and how BPM can support your valuation needs.  

1. Market-based valuation methods 

Market-based methods assess a company’s value by comparing it with similar companies or recent completed transactions in the market. These methods provide a relative measure of value and are widely used due to their market-based nature. 

The “market approach” compares your company to other comparable businesses that have publicly-available data and/or have been recently acquired. Market-based methods work best when there’s sufficient data on companies of similar size, industry and financial characteristics, enabling the closest apples-to-apples comparisons possible. 

• Guideline companies analysis 
  A Guideline Companies Analysis (Comps), or Guideline Public Company Method, involves identifying publicly-traded companies in the same or similar industry with similar financial and economic characteristics. Analysts use financial metrics and multiples such as Price to Earnings (P/E), Enterprise Value to EBITDA (EV/EBITDA), Enterprise Value to Revenue (EV/Revenue) and Price to Book (P/B) ratios indicated by the Comps and apply metrics to the target company’s financials based on a comparative analysis. 

For example, when valuing a software company with $10 million EBITDA, if similar public software companies trade at 15x EBITDA, the implied value of such an applied multiple would be $150 million.  

• Precedent transactions analysis 
  Precedent Transactions Analysis examines recent completed and/or announced M&A transactions involving similar companies. This method analyzes the deal multiples paid in these transactions, adjusting for differences in size, market conditions and anticipated synergies indicated by a specific deal. It gauges what acquirers have historically paid for companies similar to the target. 

Using the same software company example from above, if recent software acquisitions occurred at 18x EBITDA, the implied value of such an applied multiple would be $180 million.  

2. Income-based valuation methods 

Income-based methods focus on the future earning potential of the target company. These methods, such as Discounted Cash Flow (DCF) analysis, estimate the present value of expected future cash flows generated by the business and directly link valuation to the underlying financial performance, relying on both historical and projected financial performance to estimate value. 

• Discounted cash flow analysis 
  The DCF method starts by forecasting the future cash flows of the business being evaluated. These cash flows represent the net amount of free cash expected to be available to interest holders for a specific period. The future cash flows are then discounted back to their present value using a discount rate, typically reflecting the weighted average cost of capital (WACC) or some other supported expected rate of required return. 

For example, if a company’s projected cash flows are $12 million in Year 1, $14 million in Year 2, $16 million in Year 3, with a terminal value of $200 million at the end of Year 3, using a 10 percent discount rate would yield a total value of approximately $186.5 million (assuming mid-year convention for the annual cash flows). 

There are many critical nuances to an applied DCF analysis for a complex financial instrument such as an operating company. Its application can provide the most precise and refined estimate of value. However, many critical nuances come with a DCF application and applied expertise is critical to ensure an appropriate indication of value using this method. 

• Capitalized cash flow analysis 

This method calculates the value of a business based on a single period’s cash flow, which is typically normalized to represent sustainable estimated long-term performance. By dividing this normalized cash flow by a capitalization rate (which reflects the risk and expected growth rate), this approach determines the present value of all future estimated cash flows. This method is most applicable to interests with a consistent expected cash flow generating capacity.  

For example, if a business generates a normalized annual cash flow of $5 million and has a capitalization rate of 8%, its implied value would be $62.5 million ($5 million ÷ 0.08). In the context of business valuation, this method is particularly applicable for stable businesses with predictable cash flows. It would not be appropriate to value businesses in growth or other significant transition phases. 

3. Asset-based valuation methods 

Asset-based valuation methods may also role in M&A, particularly for companies with significant physical assets or those undergoing liquidation. These methods may be particularly relevant for industries such as real estate, oil & gas, manufacturing, mining, and utilities, which often have substantial investments in tangible assets. 

• Adjusted book value method 
  This method assesses the company’s value based on its balance sheet, adjusting for specific assets and liabilities at market values. This often involves revaluing assets that have changes in market value that may materially diverge from depreciated/amortized book value since their purchase. The method also requires updating book liabilities to reflect more accurate adjusted figures to account for changes in liability-specific and/or market factors. 

• Liquidation value 
  The Liquidation Value method estimates the net cash that would be received if all assets were sold and liabilities settled. This value is typically lower than other valuation methods as it assumes assets are sold under distressed conditions. 

Best practice spotlight: Net Working Capital benchmarking 

When evaluating a company’s financial health during M&A, analyzing net working capital (NWC) against industry benchmarks provides valuable insights. By comparing a company’s performance to market indications, buyers can better understand operational efficiency and financial position relative to market participants and assess the impact on expected impacts to post-deal cash flows. Often, in M&A an NWC peg is defined in the deal negotiation and any net surplus or deficit versus the peg is adjusted to the final deal price. Proper benchmarking can help with defining the NWC peg, which can result in real cash impact to buyers and sellers. 

Special considerations in M&A valuation 

Synergies arise when the combined performance of two companies exceeds the sum of their separate operations. Proper assessment of potential synergies, including cost savings, revenue enhancements and operational efficiencies, is critical to analyzing the potential success of a proposed deal. Accurately estimating these synergies requires an in-depth understanding of how the two companies expect to integrate. 

Expected synergies can have a material impact on the potential premium a buyer may be willing to pay to acquire a target company. Understanding the impact of control and synergistic premiums in deal negotiations can have a material impact on negotiations and ultimate deal pricing. 

Choosing the right valuation approach 

Along with the quantitative analytical component, the art element of M&A valuation lies in turning qualitative factors into quantitative adjustments. Valuation professionals take intangible factors like intellectual property, strong customer relationships, tradname strength, and barriers to entry and translate them into numerical impacts that help align deal expectations and terms. 

The best M&A valuations will not rely solely on a single method. Instead, a combination of methods ensures the valuation reflects a triangulated indication of value, helping develop clarity on fairness and reasonableness in a pending deal. Often an indicated range can be helpful to determine potential negotiating parameters and sensitivity bands.  

How BPM can help with your M&A valuation 

Navigating the complex world of M&A valuations requires both technical knowledge and practical experience. At BPM, our team of valuation professionals brings decades of combined experience in helping businesses determine reasonable and fair value in the marketplace.  

We offer comprehensive M&A valuation services including market multiples analysis, net working capital benchmarking, forecasting and cash flow modeling and comparable company analysis. Our professionals work closely with you to identify the most appropriate valuation methodologies for your specific situation, ensuring you have a clear understanding of your company’s (or a potential target’s) value. 

“BPM helps our clients understand the key metrics and levers that impact the market value of their business or a potential target. We help companies on both the buy and sell side determine value indications that help win-win deals occur. Understanding the financial metrics and key levers, and also the critical people components, enables us to provide value in one of the most critical phases of a company’s lifecycle.”- Kemp Moyer, Partner – Advisory 

Our professionals will guide you through the entire process, providing the insights and analysis you need to make informed decisions about your business’s future. To schedule a consultation with our valuation team, contact us.