In the world of mergers and acquisitions, determining a business’s true value remains one of the most complex challenges facing sellers and buyers alike. Whilst buyers rarely disclose their exact valuation criteria for fear of inflating prices, their critiques during negotiations offer invaluable glimpses into what truly drives—or detracts from—value. Understanding these signals has never been more critical than in 2025’s evolving M&A landscape.
The Current M&A Landscape: Recovery and Transformation
Following a challenging 2023, the M&A market has shown remarkable resilience. Global M&A volumes increased 16% to approximately £2.5 trillion in 2024, with dealmakers adapting to new realities including AI disruption, geopolitical uncertainty, and evolving regulatory frameworks. As we move through 2025, median global multiples have settled at 10.8x EBITDA, reflecting a more cautious but opportunistic approach to valuations.
The rise of artificial intelligence has fundamentally altered the due diligence landscape. According to recent data, 70% of private equity firms have walked away from deals after identifying that AI could negatively impact the target’s business model. Conversely, 64% of business leaders plan to pursue M&A within the next 12 months specifically to strengthen their AI capabilities.
The Science Behind Business Valuation
A surprising truth emerges from analysing thousands of transactions: business buyers, particularly private equity groups, follow remarkably consistent valuation methodologies. Like seasoned detectives, they scour for specific clues to assess a target’s potential, conducting increasingly thorough due diligence that now takes significantly longer than in previous years.
Despite many buyers claiming industry agnosticism, certain qualities hold universal allure across sectors. Understanding these preferences—and their opposites—can mean the difference between a premium valuation and a failed sale process.
Universal Value Drivers in Today’s Market
The Holy Grail: Predictable, Recurring Revenue
Investors crave consistent, contractual revenue streams more than ever. In an era of economic uncertainty, businesses generating reliable, recurring profits command premium valuations. SaaS companies with 90%+ renewal rates, for instance, attract significantly higher multiples than those dependent on new customer acquisition.
The Digital Advantage: AI and Technology Integration
The ability to leverage AI and digital technologies has become a critical value driver. Companies demonstrating how AI enhances their operations, improves margins, or creates competitive moats see valuation premiums averaging 25.8x revenue in AI-focused sectors—well above traditional industry multiples.
The Scalability Factor: Growth Without Proportional Cost
Buyers seek businesses with proven scalability—the ability to expand revenue without proportionally increasing costs. Asset-light models, particularly in technology and services sectors, command higher multiples due to their sustainable cash flows and growth prospects.
The Fortress: Sustainable Competitive Advantages
Strong intellectual property, deep customer relationships, high switching costs, or unique market positions create defensive moats that buyers prize. In 2025’s competitive landscape, differentiation isn’t just valuable—it’s essential for attracting serious acquirers.
The Hidden Value Detractors: What Drives Prices Down
Understanding what diminishes value is equally crucial. Our analysis of recent transactions reveals consistent patterns in what causes buyers to reduce offers or walk away entirely:
1. Over-Reliance on New Sales vs Recurring Revenue
Businesses dependent on constantly acquiring new customers face steep valuation discounts. The cost of customer acquisition has risen dramatically, making recurring revenue models increasingly attractive by comparison.
2. Key Person Dependencies
Owner-centric operations remain the single biggest risk factor in SME acquisitions. When critical relationships, knowledge, or decision-making rests with the departing owner, buyers face significant transition risk. This “key person discount” can reduce valuations by 20-40%.
3. Customer Concentration Risk
Having more than 20% of revenue from any single customer creates vulnerability that buyers aggressively discount. The loss of one major account could devastate the business, making diversification essential for maximising value.
4. Technological Obsolescence Risk
In 2025, businesses that haven’t adapted to AI and digital transformation face existential threats. Buyers now conduct specific “AI impact assessments” to determine whether targets might be disrupted by emerging technologies.
5. Limited or Declining Market Opportunities
Operating in shrinking markets or narrow niches caps growth potential. Buyers seek businesses positioned in expanding sectors with clear paths to market share growth.
6. Weak Financial Systems and Controls
Poor financial reporting, inconsistent metrics, or lack of robust systems signal operational immaturity. Modern buyers expect institutional-quality financial management, even from smaller targets.
7. Regulatory and Compliance Gaps
With increasing ESG requirements and sector-specific regulations, compliance failures create immediate value destruction. Buyers now conduct extensive regulatory due diligence, with issues often becoming deal-breakers.
The AI Factor: New Opportunities and Threats
Artificial intelligence has introduced entirely new dimensions to business valuation:
AI as Opportunity:
- Companies using AI to improve operations see average margin improvements of 30%
- AI-native businesses in high-growth niches command multiples exceeding 50x revenue
- Demonstrated AI capabilities attract strategic buyers seeking technological advancement
AI as Threat:
- Traditional business models face disruption from AI-powered competitors
- Manual processes that AI can automate represent future margin compression
- Lack of AI strategy signals potential obsolescence to forward-thinking buyers
Practical Steps: The Proactive Value Enhancement Playbook
1. Conduct a Simulated Buyer Review
Engage advisers to perform mock due diligence, identifying issues buyers will uncover. This “pre-flight check” reveals fixable problems before they impact negotiations.
2. Build Recurring Revenue Streams
Transform transaction-based revenue into subscription or contract models where possible. Even partial conversion significantly enhances valuation multiples.
3. Document and Distribute Knowledge
Create comprehensive operations manuals, document key processes, and ensure multiple team members can handle critical functions. Reducing key person risk directly increases value.
4. Diversify Your Customer Base
Implement strategies to reduce customer concentration before entering sale processes. No single customer should represent more than 15% of revenue.
5. Embrace Digital Transformation
Develop clear AI and technology strategies. Demonstrate how technology enhances your competitive position rather than threatens it.
6. Strengthen Financial Infrastructure
Invest in robust financial systems, regular reporting, and clean documentation. Quality of earnings adjustments often surprise sellers—prepare accordingly.
7. Address Regulatory Compliance Proactively
Conduct compliance audits and remedy issues before they surface in due diligence. With ESG considerations increasingly important, demonstrating strong governance adds value.
Real-World Impact: Learning from Recent Transactions
Recent negotiations underscore these principles. In technology sector acquisitions, buyers routinely identify risks such as:
- Technical debt requiring significant investment
- Dependence on legacy systems facing obsolescence
- Insufficient cybersecurity measures
- Weak intellectual property protection
- Inadequate data privacy compliance
Addressing these proactively can increase sale proceeds by 20-50% whilst reducing deal risk and increasing the likelihood of cash payments versus earnouts.
The Due Diligence Evolution
Modern due diligence extends far beyond financial analysis. Buyers now employ:
- AI-powered deal scanning tools to identify risks and opportunities
- Extended diligence periods with deeper operational reviews
- Management presentations and cultural assessments
- Technical architecture reviews for scalability
- Comprehensive ESG and sustainability evaluations
Sellers must prepare for this scrutiny by organising comprehensive data rooms, conducting vendor due diligence, and addressing issues proactively.
Maximising Value in 2025’s Market
The path to exceptional sale outcomes requires viewing your business through acquirers’ eyes. By understanding their value drivers and addressing their concerns proactively, sellers can:
- Command premium valuations despite market uncertainty
- Attract multiple competitive offers
- Negotiate better terms with reduced contingencies
- Achieve higher proportions of upfront cash consideration
- Ensure smoother post-acquisition integration
Summary
In today’s sophisticated M&A environment, success belongs to prepared sellers who understand buyer psychology and address concerns before they arise. By leveraging negative feedback constructively and implementing strategic improvements, business owners can transform potential weaknesses into strengths, ultimately maximising their life’s work value.
The message is clear: in 2025’s market, proactive value enhancement isn’t optional—it’s essential for achieving exceptional sale outcomes.
About Lighthouse Advisory Partners
Lighthouse Advisory Partners: Leaders in tech M&A and strategy consulting.
As a premier strategy consulting firm, Lighthouse specialises in empowering tech companies to chart clear paths toward growth and enhanced value. Our expertise in strategy, mergers, and acquisitions makes us the ideal partner for businesses navigating the complexities of selling in the technology sector.
Our team combines deep industry knowledge with cutting-edge insights on AI transformation, helping clients position themselves advantageously in an evolving market. Let us guide you to your next horizon of success.