cfo matters

What the Textbooks Miss in Valuation Practice (Part 1/2)

Have you ever sat down with someone who built a billion-dollar empire from scratch and realised they couldn’t name a single valuation method? I did. It was a family business—no fancy tech, no groundbreaking innovation—just savvy operators in a tough industry who built massive moats using mergers and acquisitions (M&A).

And here’s the kicker: Not one of them had a college degree. Forget MBAs—they probably thought “DCF” stood for “Don’t Care, Friend.” Yet, they managed to achieve something most of the smartest folks from top business schools only dream of—adding a third comma to their bank accounts.

I’ve worked with incredibly sharp minds, dissecting valuation methodologies with managing directors from every big investment bank you could name. They had successful careers, no doubt. But billionaires? Not quite.

The magic formula these self-made billionaires used wasn’t some complex valuation model. They didn’t calculate terminal growth rates or lose sleep over internal rates of return (IRR). Instead, they had an uncanny ability to buy assets and businesses at prices so low, they simply couldn’t lose.

The Art of Patience and Simplicity

Their strategy was beautifully straightforward: find good assets being run poorly, and wait. Sometimes for years, even decades. When the time was right, they’d swoop in, buying at or near book value. They’d improve profitability, integrate the asset into their core operation, and voilà—instant value creation. They bought at book values and held or sold at an earnings multiple.

They understood that valuation isn’t a precise science. It’s more like art. You can analyze all you want, but at the end of the day, if you try hard enough, you can justify any price within a range. It’s a minefield of cognitive biases and conflicts of interest—something I’m sure you’ve seen before.

Enterprise Value vs. Equity Value: Let’s Break It Down

Before we dive into methodologies, let’s clear up two critical terms: Enterprise Value and Equity Value.

• Enterprise Value is the total value of a company’s assets, excluding its debt and cash. It’s like looking at a car’s price without considering how much gas is in the tank or if it has a loan on it.
• Equity Value is what you’d actually pay to buy the business. You start with the enterprise value, add cash, subtract debt, and adjust for working capital.

Why does this matter? Because acquisition offers are typically made on an enterprise value basis. The tricky part is bridging enterprise value to equity value, which is why valuation conversations often start with enterprise value—it keeps things clean and comparable.

Valuation: The “Science” That Often Misses the Art

Ever heard the saying, “A business is worth whatever someone is willing to pay for it”? Yeah, I hate that cliché. It’s not just unhelpful; it’s misleading. It ignores the massive information gap between buyers and sellers. It’s like saying, “A house is worth whatever the highest bidder offers,” without mentioning if the roof leaks or if it’s haunted.

For us finance nerds, there are three main schools of valuation theory:

1. Discounted Cash Flow (DCF) – The purist’s method. It calculates the present value of future cash flows. It’s technically perfect but relies on forecasts, which are, let’s face it, often just educated guesses.
2. Multiples of a Metric – The practical approach. You apply a multiple (derived from similar deals) to a business metric, usually EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). It’s less precise but more real-world.
3. Asset-Based Valuation – Common in distressed sales, this method values each asset separately. It’s like selling a car for its parts instead of as a whole.

In part 2, I will share my experience on a textbook method that seems to fall short.

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Ever been in a situation where you’re convinced you’re right, only to have someone prove you completely wrong—and teach you a lesson you’ll never forget? Yeah, me too.

Years ago, I was deep in the trenches of an M&A deal, arguing with an MD from a global investment bank. Let’s call him Andrew. We were running a divestiture, and the first-round bids were in. Two bidders were solid contenders, a third was ruled out, and then there was this fourth guy—offering 20% less than even the one we’d just rejected. In my mind, this was an easy call. Cut them loose.

But Andrew? He was adamant.

“Forget the bid,” he said. “This is Round 1. They’re the right buyer. They just don’t know it yet. We haven’t done a good enough job showing them why. Give me time—I’m confident they’ll end up at the top.”

I wasn’t convinced, but I made him a deal: If he was wrong, he’d kiss half a million dollars of his fee goodbye. He agreed.

And then, I watched a master at work.

Andrew reverse-engineered every part of their valuation. Without even seeing their model, he figured out where their assumptions were off—underestimating revenue growth, overestimating marketing costs. He worked his magic, guiding them to see what he saw. A few weeks later, they’d raised their bid by 30%. Meanwhile, the other bidders lost confidence and lowered theirs.

The result? The buyer I wanted to kick out won the auction—by 15%.

Andrew didn’t just find the best buyer; he made them the best buyer. And I learned a lesson that’s stuck with me ever since: In M&A, success often comes down to seeing the signal in the noise.

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Why M&A?

At its core, M&A is about finding the best possible owner for a business. And the best owner? They’re the one who can extract the most value—whether through synergies, financial engineering, or just pure operational excellence.

But here’s the kicker: The best owner doesn’t always start out as the highest bidder. That’s why deals fall apart when buyers overpay based on flawed assumptions, or when sellers fail to see potential in the “wrong” places.

And if you’re thinking, Well, it must work pretty well if companies keep doing it, consider this: 70–90% of M&A deals fail. Yep, fail—as in, they destroy shareholder value. Harvard Business School says so, and who am I to argue? I don’t even have a business degree from Harvard. 

Why Does M&A Fail?

Most deals go wrong for one of these three reasons:

1. Wrong Target – Poor fit, bad strategy, unrealistic expectations.
2. Wrong Deal – Overpaying, weak due diligence, terrible timing.
3. Wrong Execution – Botched integration, cultural clashes, operational chaos.

And let’s be honest—ego plays a huge role. Execs love empire-building. Bigger companies mean bigger paychecks, bigger influence. But size doesn’t equal success. And when CEOs think they’ve got the Midas touch, things get dangerous fast.

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The 10–30% That Get It Right

Enough with the doom and gloom. Some deals do work. What separates them from the disasters?

Four things:

1. A Strong Core Business – M&A can’t fix a broken company. If your house is on fire, don’t go house shopping—put out the flames first.
2. A Solid Acquisition Case – If you can’t validate the numbers, you’re gambling, not investing.
3. A Lean, Expert Deal Team – No fluff, no politics, just the best people making smart decisions.
4. Flawless Integration & Execution – Great plans don’t matter if you don’t have rockstars leading the charge.

M&A isn’t just a financial transaction—it’s a high-stakes game of strategy, psychology, and execution. And like any game, the best players see what others don’t.

So, next time you’re looking at a deal, ask yourself: Are we seeing the real opportunity, or just the noise?

And if you’re ever unsure—find your own Andrew.