The Growth Knowledge Gap in Enterprise Value
Through a good chunk of my career, I negotiated, purchased, and activated major sports and music partnerships. During deal negotiations, a good friend of mine would always ask me, “What will you own?”
His core question was spot on. What would we truly “own” as a partner that our target market cared about and that we could use to drive engagement? Absent an answer, you could make the case there was no reason to do the deal.
For lower-middle-market and middle-market investors, it’s somewhat similar. A business can command an impressive enterprise value but still leave a hard question: What exactly are you buying?
Financial analysis is just one part of the answer. Understanding how the business actually grows is another. Too often, there's a knowledge gap between the two.
A buyer may be acquiring a company with healthy margins, a respected customer base, and several years of growth behind it.
The truth is those results may be due to one or a combination of several reasons: a repeatable commercial system, a founder’s relationships, an unusually productive salesperson, favorable market conditions, or pricing power.
The question is which of those the company can sustain, strengthen, replicate, or change. That distinction does not make enterprise value less useful.
On the contrary, it makes understanding the business (filling that growth knowledge gap) beyond an enterprise valuation more important.
Though a valuation can reflect confidence in future performance, it does not guarantee the company is equipped to deliver it.
What enterprise value tells us, and what it does not
Enterprise value measures the value of a company’s operating business. It differs from the value of its shareholders’ ownership because it accounts for debt and cash, among other adjustments.
Investors often discuss enterprise value in relation to earnings or revenue. Those comparisons provide useful reference points and ratios, but they do not explain what drives the numbers.
When someone says a company sold for 12 times EBITDA, we can learn something about its valuation in the context of its industry, growth, and other variables. However, we still need to understand how the company wins customers, keeps them, creates market demand, stands apart from competitors, and turns demand into profitable growth.
That is the question that interests me as a marketer: What is behind the results, and how well is the business equipped to keep producing them?
Why the same multiple can mean very different things
A 12x multiple for one company may reflect a strong recurring-revenue base, high retention, clear differentiation, a deep, aligned leadership bench, and a large market with room to grow. A 12x multiple for another may reflect a hot category, a temporarily favorable customer mix, and earnings that depend heavily on the founder closing major deals.
The multiple is the same. The risk is not.
Consider two hypothetical specialty distribution businesses. Both report $10 million in EBITDA. Both have grown revenue at 15 percent annually. Both attract buyer interest at an enterprise value of around $120 million.
The first has a disciplined sales process, defined account coverage, useful customer data, a marketing engine that creates qualified demand, and management that agrees on where the next leg of growth will come from. Its growth may slow, but the system supporting it is understandable, more transferable, and less dependent on any one person.
The second has a handful of high-value relationships managed directly by the owner. Its sales team is experienced but inconsistent. Marketing is largely event-driven. No one can clearly explain why win rates vary by region, or which parts of the offering customers value most. Its historical results may be real, but its future results are more dependent on people and conditions that may change after a transaction.
Neither company is automatically a bad investment. The point is that similar financial performance and valuations can sit on top of very different growth foundations: one with a more repeatable growth system and one with greater dependence on individual relationships and changing conditions.
Understanding those foundations helps an investor assess the assumptions behind the valuation and the work required to support future growth.
Fill the Enterprise Value Growth Knowledge Gap: Know what produced results
Lower-middle-market and middle-market deal teams carefully examine reported earnings, adjustments, and the assumptions behind financial performance. That work is essential.
But alongside it sits another question: What produced these earnings, and is the company equipped to keep producing them?
Customer concentration is one example. So are customer retention, pricing, sales productivity, lead quality, and the time it takes a new seller to become productive. Each deserves attention individually. They also need to be understood as connected parts of the company’s growth system.
A company that has raised prices successfully for three years may have real market power. Or it may be benefiting from industrywide inflation and a customer base that has not yet found alternatives. A business with a strong pipeline may have an effective demand-generation engine. Or it may have one large opportunity that makes the dashboard look healthy for a quarter.
Commercial diligence can examine these questions through management interviews, customer research, market analysis, and operating data. A standardized assessment can complement that work by making leadership perspectives and growth constraints easier to compare.
Again, though the financial results may look similar, the reasons behind them are critically important to understand and address prior to the transaction or in a 100-day plan.
What about a Quality of Earnings (QofE) Report? Certainly it can identify important issues in reported earnings and the factors supporting them. However, its scope varies by engagement, so it should not be expected to fully assess other questions.
Is the sales process repeatable? Does the brand give customers a meaningful reason to choose the company? Do leaders share the same view of growth priorities? These questions connect to financial performance, but answering them requires a different approach and series of questions.
Future growth needs more than a financial assumption
An acquisition valuation reflects expectations about future performance. From my perspective, the question is whether the company’s sales, marketing, brand, culture, and functional and leadership alignment can support the growth those expectations require.
Historical numbers are evidence. They are not a warranty for future performance.
A company may have grown because it entered an underserved niche at the right moment. That is a strength, especially if the niche remains attractive. But if competitors are now entering, the company needs more than a good origin story. It needs a strategy to keep winning.
The same is true of post-acquisition plans. A 100-day plan may include sensible priorities around reporting, talent, pricing, procurement, and systems. It also needs to address what it takes to drive commercial growth, generate market demand, create brand differentiation, align leadership, and build a culture that supports the strategy through accountability, collaboration, and a willingness to adapt.
Growth plans fail quietly when the organization has not agreed on its target customer, value proposition, sales approach, ownership of marketing, or what it will take to enter a new segment.
Though the budget may be approved and the plan well formatted, execution can still drift.
Questions worth asking before assumptions become commitments
Management interviews provide valuable insight, but a good diligence process should also test those perspectives against customer feedback, operating data, and other evidence. It should make room for questions that financial statements and QofE cannot answer on their own.
How is new business actually won? Can the company explain its sales stages, conversion rates, cycle times, and reasons for wins and losses? Are high performers succeeding through a system others can use, or through personal relationships and individual judgment?
What does the market believe the company stands for? This is not a question about a logo or a brand book. It is a question about whether customers can articulate a reason to choose the company when alternatives are credible.
Where does qualified demand come from? If marketing is present, is it generating useful market intelligence and opportunities, or simply supporting events and producing materials on request? If marketing is limited, is that an intentional choice supported by an effective sales or partner model, or an overlooked growth constraint?
Does the culture support the growth strategy? Do employees own customer problems or pass them between departments? Can they challenge processes that cost business? Are teams rewarded for collaboration? When experienced employees leave, does their knowledge stay or leave with them?
Do the leaders agree? Different perspectives can improve decisions. But unrecognized disagreement about customer priorities, competitive threats, growth constraints, or the company’s next strategic move can slow execution after close.
These questions should not be treated as a search for flaws because healthy companies benefit from answering them, too.
Strong results paired with clear, repeatable growth capabilities can increase confidence in a company’s growth durability. Strong results paired with ambiguity can reduce that confidence and signal where further diligence or post-close support is needed.
Quality of Growth (QofG): The Growth Report that helps fill the
knowledge gap beyond enterprise value
The best investment decisions connect financial diligence with an understanding of how the business produces its results. They help bridge the knowledge gap beyond traditional diligence. That is the role of a structured Quality of Growth (QofG) assessment.
At The Breakout Group, the Breakout QofG Report gathers leadership input across more than 70 data points covering sales, marketing, brand, culture, functional alignment, and leadership alignment. Its proprietary Breakout Score™ provides a standardized assessment of the drivers and alignment behind growth, while AI-assisted analysis helps interpret the context in the responses.
Used alongside QofE, commercial diligence, customer calls, and management conversations, the assessment helps close the knowledge gap between reported results and the non-financial growth drivers that support them.
It can show where leaders see the same strengths, where their perspectives differ, and which constraints deserve further attention.
That does not replace judgment. It gives judgment structured leadership input and clearer priorities for further investigation.
Strong financials and the capabilities that keep producing them deserve equal attention. The two together answer the key question: What exactly are you buying?
