Name: Common Misconceptions About Firm Valuations
Uploaded: 2025-06-05T15:00:00Z
Duration: 1 min 38 s
Description: “Founders might treat the business like a piggybank or give themselves a very small compensation number which inflates profitability,” says Kevin Casey, managing director of Pathstone.

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“Founders might treat the business like a piggybank or give themselves a very small compensation number which inflates profitability,” says Kevin Casey, managing director of Pathstone.

https://m.wsj.net/video/20250604/2f0cecb2-0021-4dc4-b5ef-93b92db608c5/1/hls/manifest-hd-wifi.m3u8

Common Misconceptions About Firm Valuations

You're talking to founders, you're talking to advisors, I'm assuming they have misconceptions about their worth.

Yep.

We saw this all the time. What are some of the most common misconceptions that you see when founders say, "You know, it's my turn. I wanna be purchased and I'm worth X, Y, Z?"

The key driver of valuation is organic growth. And I think what we've seen with firms is, they've gone through a period where it's been rapid growth and it's been up into the right, and over maybe recent years growth has flattened.

Yeah.

And that's, they've probably reached some semblance of critical mass or a point of inflection where they need to invest in the business. And quick candidly, that dampens valuation, right, 'cause if we made those investments. The value would've have gone up. You know, from an earning standpoint, I think there's quite a few firms that a founders might treat the business like a piggy bank, right? And, you know, or they give themselves a very small compensation number and it inflates, you know, profitability. Well, you know, from our perspective, we look at a normalized, you know, EBITDA number and put a multiple on that. So there's a little bit of back and forth there in terms of, you know, what does a normalized P&L look like.

Yeah.

And then lastly, you know, folks look at the big numbers in the news, right, for the big platforms. And they see 20, 21, 24 times. And I think the joke is, you know, you tell me the EBITDA, I'll tell you the multiple, there's some of that as well. But there's also the fact that, you know, platforms and it is just fact, platforms trade more than mergers. That's why the M&A math ultimately works. So I think there's coming into grips with that, "Hey, you are a tuck-in acquisition." There's gonna be some, you know, multiple arbitrage and accretion when ultimately joining a platform.

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