In M&A, there’s often a disconnect between what a business is today and what it could be tomorrow. Owners see years of investment in people, systems, and strategy that haven’t fully shown up in the numbers. Buyers see the same company through a different lens: they look beyond optimism, focus on what’s proven, and pay for what they can clearly underwrite. The question that sits between them is simple but critical: when do buyers pay for potential – and when does it stay on the cutting-room floor?
Understanding “Potential” in M&A
In M&A, “potential” refers to any value creation opportunity that a company has not yet fully executed but could reasonably achieve in the hands of a capable buyer. It’s a wide-ranging concept that spans several domains:
- Intellectual Property (IP): patents, algorithms, formulations, or proprietary methods ready for commercialization.
- Untapped Markets: geographies, customer segments, or verticals the business has identified but not yet entered.
- Operational Upside: margin expansion, automation, or supply-chain efficiencies not yet optimized.
- Product Pipeline: near-launch solutions, next-generation upgrades, or adjacencies validated by customer interest.
- Technology & Infrastructure: platforms or tools built for a larger scale than the current business has exploited.
But potential is not simply aspiration. In the context of valuation, buyers look for potential that is credible, quantified, strategically relevant and achievable under new ownership.
When Do Buyers Actually Pay for Potential?
Not all potential is valued equally. Over decades of M&A experience, a consistent pattern has emerged – buyers pay for potential when it reduces uncertainty rather than increases it.
Here are the scenarios where future upside meaningfully contributes to valuation:
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When the Potential Is Supported by Data, Not Assumptions
Buyers place real value on potential only when it is backed by evidence rather than unfounded optimism. A company with a next-generation product “in development” is inherently less valuable than one that can point to paid pilot programs, customer testimonials, signed LOIs, or a visible backlog of demos in progress.
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When Future Growth Is Tied to Strategic Synergies
Strategic buyers often pay the highest premiums because they can unlock upside more efficiently than the seller. They evaluate potential through the lens of their own capabilities – distribution, brand, customer base, and infrastructure.
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When the Business Has Already Built the Infrastructure for Scale
Buyers reward readiness. Companies that have already invested in scale – enterprise-grade technology platforms, available manufacturing capacity, regulatory approvals, or processes that support multiples of the current customer load – are more likely to command higher valuations. These foundations reduce execution risk for a buyer and shorten the time required to activate growth.
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When IP Has a Clear Path to Commercialization
Intellectual property on its own rarely drives valuation; it is the commercialization path that creates value. Buyers look for market demand signals such as industry pull, prototype feedback, or interest from channel partners that show how IP translates into revenue. When patents or proprietary technology reduce competitive threat or meaningfully accelerate a buyer’s product roadmap, they command a premium.
When Buyers Don’t Pay for Potential
Buyers tend to discount or ignore upside in certain situations:
- Ideas with no execution roadmap
- Unproven markets or new verticals with no demand signals
- Projections that rely on increasing headcount before revenue is generated
- Technology still in R&D with high regulatory or technical risk
- Dependence on one or two customers for “future expansion”
Potential without proof becomes seller optimism – and buyers seldom pay for optimism.
How to Make Buyers Pay for Potential: Best Practices for Maximizing Unrealized Value
This is where sellers can dramatically influence outcomes. With the right preparation, potential becomes part of the valuation – not just part of the story.
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Quantify Everything
Translate ideas into measurable outcomes. That means sizing new markets with TAM analysis, tracking pipeline conversion rates, estimating cost savings from automation, and modeling margin uplift from supply-chain changes. Numbers move valuation; narratives alone don’t.
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Build a Data-Backed Growth Strategy
Buyers take potential seriously when it sits inside a clear, defensible growth plan. Lay out which initiatives you’ll pursue, when they can realistically start, what resources they require, and the expected ROI and payback period. The clearer the roadmap, the easier it is for buyers to value the upside.
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Demonstrate Early Traction
Even small wins can make a big difference to valuation. Pilot programs, beta users, first orders, interest from channel partners, customer testimonials, and engineering validations all serve as proof points. Together, they derisk the growth story and show buyers that potential is already in motion.
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Document IP and Competitive Moats Thoroughly
Sophisticated buyers pay for moats they can see and protect. Document patents, trade secrets, proprietary datasets, defensibility analyses, barriers to entry, and competitor benchmarking in a structured way. The stronger and clearer the moat, the more confidently buyers can lean into premium pricing.
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Engage Buyers Who Naturally Value Your Type of Upside
Not all buyers value the same things. Private equity firms tend to focus on operational enhancements, margin expansion, and scalable models; strategic buyers lean toward integration advantages, IP leverage, and market expansion; family offices typically prioritize durable cash flows. Matching the type of upside to the right buyer universe increases the odds that potential converts into real offers.
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Prepare for Diligence Early
If potential is part of the price, it has to survive diligence. Validate assumptions, organize data sources, prepare detailed customer logs, and clearly link historical performance to future projections, then rehearse management Q&A around the growth story. Buyers pay for upside when diligence confirms the narrative – not when it exposes gaps.
Conclusion
In summary, buyers do pay for potential – but only when it’s translated into something they can value with confidence. When future upside is supported by evidence, clearly articulated, and aligned with the right buyer universe, it becomes a real driver of valuation. The goal is simple: turn unrealized opportunities into a credible growth story that buyers can quantify; and act on.
If you’re preparing for a sale in the next 6 to 18 months and want to ensure your company’s potential is properly recognized – and rewarded – reach out to Harney Capital for a confidential discussion. Our team can help you shape the narrative, build the proof, and position your business for a competitive, value maximizing process.
