M&A Valuation vs Deal Structure: Why Both Matter

What Drives Valuation

Valuation in M&A is never a simple equation. It depends on both company-specific and market-specific factors.

Company-specific factors:

• Growth – revenue momentum and future expansion opportunities drive up valuations.
• Size – larger companies often achieve higher multiples due to scale, stability, and attractiveness to buyers.
• Client concentration – businesses overly reliant on a few clients often see discounted multiples.
• Pipeline visibility – forward visibility on contracts and renewals improves certainty and valuation.

Market-specific factors:

• Sector – some sectors (like software) attract higher multiples than others (like traditional services).
• Geography – location plays a big role. For example, US companies typically command much higher multiples than Australian counterparts, reflecting the larger addressable market and stronger growth potential in that geography.
• Buyer type – valuation appetite varies between buyer groups. Private equity funds typically value businesses based on financial returns and may apply more conservative multiples. Strategic buyers, however, may be willing to pay a premium if the acquisition delivers synergies, market entry, or a critical capability.

Some of these company-specific factors are covered in more detail in our earlier blog on Key Metrics That Matter in B2B Services Deals. Ultimately, growth is the most important factor – buyers pay a premium for businesses with strong revenue momentum and clear visibility on future expansion.

It’s also important to remember that valuation is not static. Market sentiment and buyer appetite shift with conditions, which we track in SCD’s quarterly On The Pulse report on B2B services multiples. The same enterprise value can also produce very different implied multiples depending on the reference year used – whether last year’s results, the last 12 months, the current year forecast, or the next 12 months.

Multiples may also be based on revenue or profit, depending on the business model and sector norms. For example, SaaS companies are often valued on revenue, while consulting firms are more commonly valued on EBITDA.

Why Deal Structure Matters Just as Much

While valuation sets the headline price, the deal structure determines how and when shareholders actually receive that value. Key considerations include:

• Upfront vs deferred/earnout – How much is paid at completion versus contingent on future performance? Earnouts often depend on hitting revenue, profit, staff retention, or client retention targets.
• Cash vs scrip – Is consideration delivered in cash, or partly in shares of the acquiring company?
• Sector differences – In asset-heavy businesses, buyers often pay a higher proportion upfront given the predictable earnings base. In contrast, IT services and other people-driven businesses usually involve earnouts, with 30-50% upfront and the balance deferred over 2-3 years, tied to factors like client or staff retention and profitability.
• Buyer type – Different buyers approach risk differently. Private equity funds often prefer a greater portion of deferred consideration to manage downside risk, while strategic buyers may stretch for higher upfront payments to secure a must-have asset or capability.
• Buyer preferences – Even within the same category of buyers, investment patterns vary. In services deals, upfront payments can range from 30–70% depending on who is buying.

There is often a correlation between valuation and deal structure: higher upfront payments may come with more conservative multiples, while more aggressive valuations are sometimes offered with heavier earnout components.

An Illustrative Example

Imagine two buyers both offering $50m enterprise value for a company:

• Buyer A proposes 30% upfront and 70% earnout over three years based on profit targets.
• Buyer B proposes 70% upfront and 30% earnout on the same basis.

On paper, both deals are worth $50m. But on day one, the seller receives $15m from Buyer A vs $35m from Buyer B. The immediate liquidity – and therefore the real “valuation” at completion – differs significantly, and so does the implied multiple.

This is why sellers must look beyond headline numbers. A $50m deal can mean very different outcomes depending on how it is structured.

The Role of the M&A Advisor

Negotiating deal structure is where an experienced M&A advisor adds significant value. While sellers may focus on headline valuation, advisors ensure that the terms of payment, earnout conditions, and performance metrics are structured to protect the seller’s interests. This includes:

• Pushing for a balanced split between upfront and deferred consideration.
• Ensuring earnout targets are realistic, measurable, and within the seller’s control.
• Negotiating protections around client or staff retention clauses.
• Comparing different buyer approaches to highlight true day-one value.
• Helping sellers understand the risk-adjusted value of competing offers.

By bridging valuation and deal structure, an advisor helps maximise both certainty and upside, while reducing the risk that sellers “leave money on the table” through overly restrictive earnout terms.

For more on the value an advisor can bring, see our previous blogs What Questions Should You Ask a Sell-Side Advisor? and The ROI of Hiring an Investment Banker.

Takeaway

Valuation and deal structure are two sides of the same coin. Headline multiples grab attention, but it is growth that ultimately drives valuation. The mix of upfront vs deferred consideration, cash vs scrip, and the conditions attached to earnouts then determine how and when that value is realised in practice.

This is where the M&A advisor plays a crucial role – navigating between valuation and structure to secure the right balance of upfront liquidity and longer-term upside.

When evaluating offers, it’s not just about how much – but also how and when – the value is realised.