What the Textbooks Miss in Valuation Practice (Part 2)
The DCF Trap: When Perfect Math Meets Imperfect Reality
DCF might look great in a textbook, but in real life? It can be a bit of a trap. It’s built entirely on forecasted assumptions, and you know how that goes. Especially in M&A, where the seller is probably handing you a forecast that’s, let’s say, optimistically inflated.
Take a business generating $500 in free cash flow. Using an 8% growth rate and a 10% discount rate, you get a DCF of $23,310. Change those assumptions by just 1%, and the valuation can drop by half. The model is only as good as the guesswork behind it.
Why Comparable Transactions Are the Real MVP
This is why I lean on comparable transactions. They provide a sanity check against market reality. If DCF is the theory, comparables are the antidote. They help you understand the range of multiples in similar deals and adjust for qualitative factors like market potential and risk.
But here’s the rub: In high capex industries, EBITDA multiples can be misleading. Two businesses with the same EBITDA might have very different capital needs. The solution? Use EBITDA less recurring capex as your metric. It’s a closer proxy to real cash flow and a much better basis for valuation.
Synergies: The Good, The Bad, and The Ugly
When it comes to synergies—the supposed magic that creates deal value—always separate the hard synergies (quantifiable and reliable) from the soft ones (more like wishful thinking). You might share some hard synergies with the seller in a competitive bid, but never, ever bake soft synergies into your valuation offer. That’s a recipe for disaster.
The Reverse DCF: A Real-World Application
While I’m not a huge fan of DCF in traditional scenarios, I do like using a reverse DCF to validate valuations. You start with a market-based valuation, then work backward to see what growth and discount rate assumptions it implies. It’s a great way to test whether your assumptions are grounded in reality.
Practical Steps for Valuing a Business
Alright, let’s wrap this up with a practical framework I use:
Understand the acquisition perimeter – What exactly are you buying?
Break down the business into cash-generating units – Separate profit-makers from loss-makers.
Choose your valuation method – Earnings-based or asset-based.
Apply the right multiples – Use comparables, adjust for capex needs, and ensure your assumptions make sense.
Backtest with a reverse DCF – This is your reality check.
Include hard synergies only – And decide how much of that value to include in your offer.
So, What’s the Bottom Line?
Valuation is messy. It’s part art, part science, and part gut feeling. The smartest deals I’ve seen are the ones where the price is so good, the details almost don’t matter. When you buy well, you create a margin of safety that smooths over any miscalculations.
But hey, that’s just my take. What’s been your experience with valuation? Have you seen deals where the “textbook” approach fell short? come email uncle at TalkTo@UncleHuat.com
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:
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.
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.
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.
Disclaimer Note: The following account is based on my personal experience leading end-to-end M&A activities. For confidentiality and legal purposes, the names of the companies have been changed, and any resemblance to real organizations is purely coincidental. This article is intended solely for educational purposes and aims to share insights and lessons learned with the professional community. It does not reflect the views of any specific company or entity.
Beyond the Numbers: The Transformative Journey of Big Old Media Company and TEA
It all began over coffee. Somewhere in a quiet restaurant in Dempsey, the leaders of TEA and Big Old Media Company (BOMC) found themselves in a conversation that went beyond small talk. They spoke about the challenges of running a media business in an increasingly digital world, the hunger for fresh ideas, and the vast opportunities in Southeast Asia’s thriving tech ecosystem.
It was an unassuming meeting, but by the end of it, a seed was planted. Months later, in late 2023, that conversation blossomed into a groundbreaking merger. BOMC announced its acquisition of TEA. For BOMC, it was a bold step to embrace a younger, tech-savvy audience. For TEA, it was a chance to secure resources and expand its mission-driven vision. Together, they embarked on a journey that they hoped would reshape the regional media landscape.
A Shared Vision in a Changing Industry
For over a decade, TEA has been the go-to platform for tech enthusiasts and startup founders across Asia. Founded in 2009 as a personal blog, it grew into a trusted source of news, insights, and events. TEA’s annual conferences drew thousands, while its media offerings became indispensable for understanding the region’s fast-evolving startup ecosystem.
BOMC, on the other hand, represented legacy media. Known for its stalwart publications like the Old National Newspaper and the Old Business-Focused Newspaper, it dominated print and digital news in Singapore. Yet, the rise of digital platforms and shifting reader preferences meant BOMC needed to innovate—or risk losing relevance.
The two companies were paper and keyboard apart. TEA was nimble and entrepreneurial; BOMC was established and methodical. But both shared a common challenge: staying relevant in an era of digital disruption. The deal became not just about financial returns but about reimagining the role of media in a rapidly changing region.
The Merger: Navigating Complexity
When BOMC announced its intention to acquire TEA, it sparked excitement and curiosity. The details revealed a deliberate and well-thought-out plan. BOMC pledged to let TEA operate independently for 12–18 months post-merger to preserve its innovative spirit while ensuring a smooth cultural integration.
For BOMC, the jewel in TEA’s crown wasn’t just its newsroom but its events business. TEA’s flagship conferences and meetups, particularly in Singapore and Jakarta, had become must-attend gatherings for the tech community. These events presented BOMC with an opportunity to tap into an entirely new revenue stream and deepen its regional presence.
For TEA, this meant navigating the pressures of being part of a corporate giant while retaining the freedom that had fueled its success. However, challenges loomed. BOMC’s structured, hierarchical culture needed to adapt to TEA’s agile, experimental approach.
Turning Challenges Into Opportunities
The integration process revealed some hard truths about merging two distinct entities. Early on, BOMC leadership recognized the importance of open communication. Regular town halls, collaborative workstreams, and cross-company task forces became staples of the post-merger environment.
It wasn’t always smooth sailing. For example, aligning editorial standards required extensive discussions. BOMC’s newsroom was steeped in traditional journalistic practices, while TEA thrived on fast-paced, community-driven storytelling. But by focusing on shared values—such as a commitment to quality and relevance—the teams found common ground.
On the events front, the synergies became apparent quickly. TEA’s expertise in organizing tech conferences complemented BOMC’s corporate muscle, leading to double-digit growth in sponsorship revenue within just six months. Collaborative events, such as a joint summit in 2024 under the Old Business-Focused Newspaper banner, demonstrated the power of the partnership.
A Tale of Two Cultures
Perhaps the most compelling part of the story was the cultural journey. For BOMC employees, working with TEA’s team felt like stepping into a startup for the first time. Decisions were made quickly, experiments were frequent, and failures were treated as learning opportunities.
For TEA’s team, the transition brought its own lessons. They gained access to BOMC’s vast resources and experienced the nuances of its structured and hierarchical culture, necessary for operating within a larger organization. A sense of shared purpose emerged as both sides realized the potential impact of their combined efforts.
Lessons for the Future
Looking back, the BOMC-TEA merger offers a blueprint for successful acquisitions in the media world:
Empathy Drives Integration – Respecting the culture and identity of the acquired company is as important as financial metrics.
Focus on Shared Goals – By rallying around a common mission—enhancing media’s role in Southeast Asia—the two companies achieved alignment despite their differences.
Leverage Complementary Strengths – BOMC’s scale and TEA’s agility proved to be a winning combination, creating value that neither could achieve alone.
The Road Ahead
Today, the partnership is still evolving. While the merger has already yielded tangible benefits, such as stronger event revenues and an expanded audience base, the true test will be how the companies adapt to future challenges.
Will TEA retain its innovative edge within the BOMC fold? Can BOMC fully embrace a more digital, entrepreneurial mindset? These questions remain unanswered, but one thing is clear: this is a partnership built on possibility.
I reflect on this journey not just as a business deal but as a lesson in adaptability, collaboration, and vision. The BOMC-TEA merger isn’t just a story about balance sheets and synergies—it’s a story about people, purpose, and the power of working together to build something greater than the sum of its parts. It is a true tale of one plus one equals three.
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.
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:
Wrong Target – Poor fit, bad strategy, unrealistic expectations.
Wrong Deal – Overpaying, weak due diligence, terrible timing.
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.
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:
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.
A Solid Acquisition Case – If you can’t validate the numbers, you’re gambling, not investing.
A Lean, Expert Deal Team – No fluff, no politics, just the best people making smart decisions.
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?
