Hi, it’s Thomas from Positive Capital, M&A advisory dedicated to VC-backed companies.
Today, I'm sharing an observation about how a valuation actually gets built inside the buyer.
I have been coming back to the same idea in different forms for a while: a company has two types of customers. The customers buying the product, and the customers buying the equity.
For most of my time on the sell-side, I understood that sentence in a fairly intuitive way.But over the last 24 months, I spent more time on the buy-side of live deals.
Across several situations, I saw buyers looking at software assets for different reasons: consolidation, product expansion, platform building, sometimes a mix of all three.
After a while, a pattern started to show up: I saw how valuations were actually being built.
In software M&A, sellers usually arrive with ARR as the central reference point. It is the figure used to raise capital, to compare themselves with other companies, to explain growth to the board, to discuss multiples with investors.
ARR is not just a metric. It is often the language in which the company has learned to value itself. So when a seller thinks about valuation in an M&A context, the natural reflex is to think in ARR multiples.
What I observed on the buy-side was different. In many situations, the buyers were starting from EBITDA.
It sounds old-fashioned in software.
But shareholders valued buyers on EBITDA. The future exit would likely be valued on EBITDA. The leverage capacity, the return profile, their own discussions with investors — all of that eventually came back to EBITDA.
The more interesting part is that the EBITDA used was a forward one, not what the seller’s materials showed.
A normative one. The EBITDA the business could generate after being integrated. This underwriting process is partly operational, partly financial, partly judgment. It depends on what the buyer believed he could do with the asset once it was inside his perimeter.
Then buyers apply a multiple to that normative EBITDA and the result would then be rationalized through an ARR multiple.
On one of the deals I worked on, the internal math landed at roughly 18x normative EBITDA. When translated back into ARR terms, it represented around 6x ARR — our ceiling.
Then my favorite part happened: negotiation. In any negotiation, part of the work is to make a number feel reasonable.
The number itself matters, of course. But the reference point matters just as much. Each side tries, sometimes explicitly and sometimes without really saying it, to anchor the discussion in a standard where its position can be defended. Once that standard is accepted, the rest of the negotiation happens inside that frame.
For a low-growth software business, around 3x ARR can often be presented as a fair market reference. It is a number a buyer can defend without turning the discussion into a special case.
So when our bid came around that level, we weren’t irrational or aggressive. We were operating inside a frame that already feels acceptable to the market.
From there, moving a few tenths above 3x ARR or using the forward ARR instead can feel like a real negotiation for the seller. A premium feels like a premium, even if we were still far below the price we could justify internally.
In the end, everyone left happy. Everyone had the same comps, the same arithmetic, the same information. The gap came entirely from which standard each side was reading in.
That’s a game I felt worth sharing.
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