Beyond EBITDA: Rethinking Value in Private Equity
The Evolution of Valuation Multiples in Portfolio Companies
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July 03, 2025
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This article was published on Capital & Corporate magazine in June, 2025.
Private equity funds typically rely on three main levers to generate value in their portfolio companies: business growth, operational profitability and cash flow generation improvements, and effective financial leverage management. When well executed, these levers create measurable value. However, a fourth lever is often underestimated: the valuation multiple.
Although less tangible, the valuation multiple is crucial in the value creation equation. In many cases, a lack of focus on the multiple explains why deals with solid operational results fall short of their expected valuations.
At FTI Consulting, we’ve learned that successfully managing the valuation multiple requires a rigorous diagnostic to identify the factors weighing it down. The most common factors include the following:
- Volatile cash flows
- Structural risks in the market or business model (e.g. geopolitical uncertainty, dependency on key talent or customer concentration)
- Lack of a compelling growth narrative or clear differentiation from competitors
- Competitive pressures that trigger price wars and erode margins
These elements might not appear on the income statement, but they significantly influence investor and buyer confidence, as well as risk perception. Therefore, actively managing the valuation multiple extends beyond traditional operational efficiency. It requires a targeted approach across three complementary dimensions.
Profitability, growth and strategic repositioning
While improved margins and stronger cash generation are essential, they alone are insufficient to ensure long-term success. Building the valuation multiple involves stabilizing and diversifying revenue streams, optimizing cost structures, and strategically repositioning the company to align with future market dynamics. Inorganic growth can be a catalyst — not only for expanding into new markets or acquiring new capabilities, but also for capturing higher multiples through arbitrage. Additionally, maintaining balanced leverage aligned with industry benchmarks further strengthens financial resilience.
Building buyer confidence through professionalization and data management
The second key dimension focuses on enhancing buyer confidence by elevating critical functions — finance, procurement, IT and commercial management — through professionalization. This enhancement process includes developing robust data management tools that offer clear visibility into business performance and dynamics. Companies that understand their data, anticipate potential risks and show operational resilience project greater maturity and reduce perceived uncertainty. Moreover, this approach helps highlight value drivers that extend beyond EBITDA (earnings before interest, taxes, depreciation and amortization), including innovation capacity, operational flexibility or strategic alignment.
Proactive market communication
A company’s self-presentation plays a pivotal role in shaping its valuation multiple. During a sale or fundraising process, a clear, structured and credible narrative is essential — it must convey strength, market insight and adaptability. This future-facing vision should be coherent and realistic. Thoughtfully coordinated communication with key stakeholders can further amplify the message. Often, compelling storytelling is a decisive factor in securing a valuation premium from prospective buyers.
In today’s low-M&A environment — where investors are increasingly selective — the ability to close a deal might hinge on how effectively the valuation multiple is managed. Effective management is not just about preparing for an exit; it’s also about building a stronger, more resilient and more attractive company for the present and the future.
At FTI Consulting, we work with private equity-backed companies — domestic and international — to embed this logic into their value-creation processes. Our approach emphasizes long-term business sustainability while crafting an equity narrative that supports strong valuations. After all, managing the valuation multiple isn’t just a financial consideration — it’s also a high-impact strategic lever.
Our recent 2025 Private Equity Value Creation Index underscores this dynamic, with leaders highlighting the need to move beyond operational levers and focus more intentionally on factors that influence multiples and buyer perception.
Reprinted with permission from Capital & Corporate
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Published
July 03, 2025
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