The Invisible Multiple: How Good Governance Quietly Lifts Valuation

By Ramesh S. Mahalingam – Ideal Capital Insights

Introduction

You’ve seen it happen.

Two companies in the same industry. Similar revenues. Similar margins. Yet when it’s time to sell, one walks away with a 10x multiple while the other struggles to get 7x.

What gives?

As an M&A advisor, I’ve been in the room when buyers make those calls. I’ve seen spreadsheets that look nearly identical… and still produce very different offers. After years of advising sellers, one truth has become increasingly clear: There’s an invisible factor at work - one that doesn’t show up in EBITDA or revenue growth charts. That factor is governance.

Not the box-ticking kind. I’m talking about real-world governance: how transparently the business operates, how risks are managed, how decisions are made and documented, how succession is planned (or not), and how easily a buyer can trust what they’re getting.

This article explores how good governance acts as a quiet multiplier, lifting valuations, building buyer confidence, and accelerating deal timelines. Whether you’re looking to sell next quarter or next decade, this invisible multiple could make all the difference.

What we mean when we talk about governance

Governance is often misunderstood as a bureaucratic necessity, relevant only to listed companies or large conglomerates. But governance, at its core, is about how decisions are made, risks are managed, and transparency is upheld.

For SMEs and family-run businesses, governance includes:

• Disclosure of financial risks and contingent liabilities

• Ethical integrity in reporting and operations

• Presence of an independent or advisory board

• Succession planning for ownership and leadership

• Separation of duties and clear delegation

• Transparent dealings with stakeholders

I have seen sellers lose deals, or suffer valuation markdowns, due to issues such as undisclosed customer concentration, hidden liabilities, or lack of internal audit processes. Conversely, businesses that presented full documentation and had visible governance structures saw quick, frictionless transactions.

" You don't need a perfect governance structure - just one that makes your business understandable, transferable, and trustworthy. "

Governance and valuation: the subtle connection

In valuation models, there is no explicit variable that reads “governance quality.” It doesn’t show up in EBITDA or get its own line in a DCF model. But it weaves through everything:

• Discount rates may be higher for firms lacking transparency.

• Risk premiums creep up when buyers sense opacity or founder-dependence.

• Earnings quality is questioned when disclosure is patchy.

• Due diligence timelines extend - and costs rise - when governance is weak.

  
  

Some flaws don’t just affect price - they scuttle deals altogether. I’ve seen sellers have to reimburse buyers for diligence costs because critical issues emerged late. I’ve also seen the opposite: a seller whose transparent governance led to a deal close in just five months.

Governance: Shield and Spear

Governance has a dual function:

• It preserves value by reducing surprises and protecting against fraud, legal disputes, or reputational damage.

• It enhances value by making the business more investable, sustainable, and attractive to strategic buyers or financial sponsors.

  
  

Some business owners ask me: “Why did my peer get bought out at 10x EBITDA, while I’m being offered just 7x?”  The answer often lies not just in cash flows or margins, but in perception. A clean, well-governed business inspires confidence. A messy one invites scrutiny.

Think of governance as airline seating:

• No governance is flying economy on a delayed flight.

• Basic governance is business class - better service, faster boarding.

• Strong governance is first class - priority access, buyer trust, and valuation uplift.

But isn’t this too much for an SME?

Governance doesn’t mean installing a full board or creating a 100-page policy manual. For most SMEs, small steps make a big difference - and they don’t require a massive cost or overhaul.

Here’s how the heavy lifts become manageable:

Concern	Perceived Heavy Lift	Practical, Scalable SME-Friendly Action
Board formation	Full-fledged board with committees	Invite 1–2 trusted external advisors or peers to form a quarterly advisory circle
Succession planning	Legal trust and HR architecture	A one-page plan identifying next-in-line leaders and knowledge handover timeline
Internal audit	Hiring Big 4	Engage an independent accountant to run quarterly checks
Policies	Dozens of manuals	Codify just a few: expense approvals, related-party dealings, whistleblower path

Governance isn’t all-or-nothing. It’s about visibility, predictability, and accountability at the level your business can handle.

The ROI of Governance: What the Numbers Say

Quantifying the value of governance in private companies is challenging. Few SMEs publicly disclose metrics, and fewer still isolate governance as a variable. But we can turn to the listed company space for reliable insight. While larger in scale, these organizations face the same scrutiny and risk-reward dynamics that buyers bring to SME transactions.

Recent research helps illuminate the premium that good governance commands:

• McKinsey found that ~90% of executives and investors believe governance programs create positive long-term value, and over 70% see short-term benefits too. These programs don’t just protect value; they actively enhance it.

• When asked about M&A deals, investors said they’d pay a median premium of 10%, and in some cases 20–50%, for companies with strong ESG performance. Even among those skeptical about ESG’s overall impact, this premium held. Governance is likely the key driver of this willingness to pay more.

• More than half of respondents saw high-quality governance as a proxy for strong management - an intangible that significantly boosts buyer confidence.

  
  

As for financial impact, governance links directly to outcomes, a meta-study by Oxford University and Arabesque found that 90% of studies linked strong governance to lower cost of capital, while 88% demonstrated improved operational performance.

While these figures are drawn from the public market, the message for private business owners is unambiguous: governance builds trust, reduces perceived risk, and improves business outcomes. Buyers of SMEs - whether financial sponsors or strategic acquirers - run similar filters. They look for evidence of controls, clarity, and competence.

“Governance may not get its own line item in a valuation model, but it shows up in the premium a buyer is willing to pay, and in how quickly they’re willing to move.”

Advisors and dealmakers routinely observe that SME sellers with visible, structured governance close transactions faster, face fewer renegotiations, and command better terms, even when headline financials look similar to their peers.

Real-world cautionary tales

Governance failures are not theoretical. They’re tangible and costly. From Theranos to Wirecard, IL&FS to Café Coffee Day, governance lapses have destroyed billions in value. And human lives.

Even in smaller, private companies, the impact is real:

• A shareholder dispute triggered by non-disclosure of a minor liability led to continued distrust and delayed the sale of remaining equity.

• A misrepresented receivable turned out to be a loss in disguise, forcing a painful renegotiation.

• A family business with no succession plan found no takers despite strong financials.

  
  

A practical governance readiness checklist for sellers

If you’re preparing to sell your business - or even raise capital - take a moment to step back from the spreadsheets and ask yourself these questions:

• Are our disclosures complete, consistent, and credible? Or would they raise eyebrows under due diligence?

  
  

• Is there a functioning board or at least a trusted advisory group to provide oversight and perspective?

  
  

• Are key policies and decision-making roles documented? Or does too much still live inside the owner’s head?

  
  

• Are our risks - financial, legal, operational, reputational - identified and actively managed?

  
  

• Is there a clear, realistic plan for succession  -  for both ownership and leadership?

You don’t need to reinvent your company overnight. Tools from the OECD and IFC offer robust governance frameworks tailored to SMEs. But often, the most powerful steps are the simplest: regular board reviews, documented decisions, delegated authority, visible ethics, and a forward-looking plan. Governance isn’t about bureaucracy  -  it’s about building buyer confidence.

A better question to ask

If you’re an owner considering a sale, don’t ask: “How do I hide the flaws in my business?”

Ask this instead: “Ramesh, how can I use governance to increase the valuation of my business?”

The answer might just put your business in a different valuation class altogether.