Business Valuation: When Numbers Become a Trap

Warren Buffett has a quote I frequently share with my clients:

“Price is what you pay; value is what you get.”

Those who confuse the two often get hurt. And in M&A, price and value are separated more often than sellers would care to admit.

Anyone who knows me knows I'm wary of valuation done too quickly.

Not because valuation needs to be mysterious. It doesn't. The real issue is different: today, there's an enormous temptation to turn company valuation into an automated process. You input a few numbers, press a button, and receive a ready-made result.

Sounds great, right?

The risk is that, in M&A, an incorrect number can do more harm than good. It can create unrealistic expectations for the seller, deter serious buyers, undermine negotiations, and turn a good company into a poorly presented opportunity.

I am convinced that more deals fail because of valuation poorly constructed than because of a high price. A high price can be negotiated. A weak thesis cannot.

Valuation is More Than Just a Calculation

Valuation is the process of estimating a company's economic value. In an M&A transaction, it serves to guide negotiations, define a defensible price range, and explain why a particular business warrants a specific value.

This last part is the most important.

A valuation good doesn't just answer "how much is it worth?". It answers "why is it worth that much?", "what sustains this value?", "what risks threaten this value?", and "how will this value be defended to a buyer?".

That's why, valuation blends financial technique, strategic insight, and judgment. There's a spreadsheet, of course. But the spreadsheet doesn't think for itself.

[Read more: How to sell a company: preparation, price, and anxiety.]

The danger of misused multiples

Multiples are useful. I use them. The market uses them. Buyers and sellers use them.

The problem is treating a multiple like a rubber stamp: "Companies in the sector trade at 8x EBITDA."

Okay. But which EBITDA? Adjusted or accounting? Recurring or inflated by an extraordinary event? With what working capital needs? With what client dependency? With what labor risk? With what governance? With what management team?

Two companies with the same EBITDA can be worth very different amounts. One might have recurring revenue, low client concentration, good governance, and an independent team. Another might depend on a single client, require high CapEx, and only function with the founder putting out fires every day.

Applying the same multiple to both is buying a pig in a poke.

I remember the case of Kraft Heinz when it acquired a portion of the traditional brand market: 3G Capital's thesis was that attractive multiples on EBITDA, combined with aggressive cost-cutting, would generate value. It worked in the short term. But Kraft Heinz eventually had to recognize a impairment billionaire in 2019, precisely because the "adjusted" EBITDA didn't capture brand erosion and the decline in organic cash generation. The multiple looked good. The thesis, however, was fragile.

And you don't have to look far. In Brazil, we saw the IPO of Petz and the subsequent merger with Cobasi being priced at revenue multiples typical of a growth thesis. When the market's mood shifted and the focus turned to profitability, those same numbers started to look expensive. It wasn't the company that changed. It was the yardstick. [Read more about Petz and Cobasi]

EBITDA is not cash

My skepticism about EBITDA is not without reason.

EBITDA can be a useful metric for preliminary comparison. But it doesn't account for working capital changes, necessary investments, taxes, interest, and other outflows that truly affect cash.

A company can have high EBITDA and generate little cash. This happens when it needs to finance growing inventory, offer long payment terms to customers, invest in machinery, technology, or asset maintenance. It also occurs when accounting shows an attractive margin, but the cash gets tied up in the operating cycle.

The case of Americanas, in 2023, exposed to the Brazilian market how financial statements can mask the reality of cash flow. I'm not saying that every difference between EBITDA and cash generation is fraud — far from it. But the case served as a collective lesson: a pretty number on the balance sheet doesn't mean a healthy company. [Read more about Americanas]

Charlie Munger used to say that every time someone uses the word EBITDA, we should replace it with "bullshit earnings." It's an exaggeration, of course. But the point is honest: EBITDA is for comparing companies, not for paying bills.

Sophisticated buyers know this. That's why they look at EBITDA to cash conversion, revenue quality, recurrence, CapEx, working capital, and margin sustainability.

Buffett talks a lot about cash generation for a simple reason: ultimately, cash pays the bills.

[Read more: Warren Buffett, Management, and the Temptation to Invent Numbers]

Discounted Cash Flow: Powerful, Yet Sensitive

Discounted Cash Flow, or DCF, is one of the most comprehensive methods for valuation. It projects a company's future cash flows and brings them to present value using a discount rate commensurate with the business's risk.

The method is excellent. Its application, not always.

Small changes in growth, margin, working capital, CapEx, or the discount rate can significantly alter the final value. Therefore, the correct question isn't "what was the DCF result?". The correct question is: "do the DCF assumptions make sense?".

I've seen projections that looked like science fiction. Accelerated growth, rising margins, well-behaved working capital, low CapEx. If everything improves simultaneously, or if the improvements lack consistency with recent history, it's wise to be suspicious. When things go wrong, they often go wrong all at once — and the person who built the spreadsheet is often the last to realize it.

Real companies are more stubborn than spreadsheets.

I recall a deal in the technology sector where the seller presented a DCF projecting 35% annual growth for five consecutive years, with expanding margins. The discount rate, naturally, was low. The buyer, a strategic relevant player, returned a spreadsheet with more reasonable assumptions: growth decelerating to the industry average, stable margins, CapEx consistent with historical data. The valuation dropped to less than half. The deal ended up being closer to the second spreadsheet's figures than the first's. The lesson is simple: DCF alone isn't convincing. What's convincing is the consistency of the assumptions.

What Needs to Be Adjusted

A valuation professional often requires adjustments before any conclusion. Among the most common are non-recurring expenses, partners' personal expenses, extraordinary revenues, related-party contracts, tax or labor contingencies, adequate management compensation, customer concentration, and real working capital needs.

These adjustments are not cosmetic. They change value.

In a family business, it's common to find the family fleet, partners' trips, salaries of relatives who don't work in operations, and rental contracts for properties owned by the owner — all within the company's accounting. When these items are "normalized," the adjusted EBITDA can increase significantly. But beware: an adjustment is only defensible if it's sustainable. Removing a real expense and claiming it "won't exist after the closing” only works if there's a serious argument behind it. Experienced buyers won't fall for it.

Founder dependence must also be assessed. If the company loses a significant portion of its commercial or operational capacity when the owner leaves, this should be reflected in the risk, price, or deal structure. In fact, it's one of the reasons why the earn-out has become an almost mandatory item in Brazilian transactions in recent years: part of the price is only paid if the company delivers, post-deal, what the spreadsheet promised.

A classic case in Brazilian retail: the sale of Granado, in 2017, to the French fund Puig. The transaction was conducted with careful attention to corporate organization, governance, and family dependence — precisely the points that a foreign strategic buyer scrutinizes. The result was a defensibly structured deal, where the value reflected not only numbers but also the institutional quality of the business.

[Read more: Organizational Culture: Strategy Follows Behavior.]

Valuation is also a narrative

This doesn't mean inventing a pretty story. It means organizing the facts coherently.

A company's value can stem from its customer portfolio, brand, technology, scale, geographical position, team, distribution channel, or its ability to generate cash with low investment requirements.

If the seller cannot explain where the value lies, the buyer will be able to explain where the risk lies.

Consider Boticário, at Natura or at Vivara. Each of these companies has a distinct value narrative — proprietary brand and channel in one case, a multi-brand platform in another, an accessible luxury positioning in the third. The final valuation number only makes sense when it's anchored in that narrative. Without a narrative, the number is orphaned. And an orphaned number, in M&A, is usually ignored or becomes a discount.

Steve Jobs used to say that “people confuse the product with the company.” The same applies to valuation: people confuse the calculation with the thesis. The calculation is the expression. The thesis is the content.

Valuation Methods: When to Use Them and Where the Danger Lies

‍

      Method                                             When it Helps                                       Where the Danger Lies

DCF Companies                      With defensible projections              Overly optimistic assumptions

EV/EBITDA                        Mature and profitable businesses        Confusing EBITDA with cash

EV/Revenue                        SaaS and growth companies    Valuing revenue without profitability

Comparable transactions     Sectors with a history of deals        Using what isn't comparable

Asset value                 Asset-intensive businesses        Ignoring cash generation capacity

‍

No single method alone is sufficient. Valuation A mature approach triangulates. It performs DCF, checks against multiples, looks at recent comparable transactions, and calibrates with what the market has actually paid. When the methods converge, there's a clear rationale. When they diverge significantly, there are many questions to ask.

The role of M&A advisory

It's time to state the obvious: valuation is rarely built by a single person looking at a spreadsheet. It's a team effort, with financial, legal, and strategic insights interacting.

M&A advisory organizes this process. It builds the Info Memo in a defensible way, anticipates buyer questions, prepares the seller for due diligence, helps structure LOI, MOU, NDA and SPA so that the agreed-upon number holds firm until closing.

And here's a point many people underestimate: the valuation doesn't end with the signing of the LOI. It continues to be tested during the due diligence. Every contingency found, every instance of customer concentration discovered, every misclassified personal expense can become ammunition for price renegotiation. That's why the best valuation is one that already anticipates what the due diligence will find. There are no good surprises in M&A — only expensive ones.

Those who prepare, negotiate. Those who improvise, accept.

Valuation taken seriously

Valuation done well isn't the highest number the seller can justify. It's the most defensible thesis they can sustain.

At Biz Invest, we take valuation seriously because it organizes the M&A conversation. When it's superficial, it creates noise. When it's well-constructed, it helps negotiate price, risk, and structure.

The number matters. But the quality of the reasoning behind it matters more.