Why standard valuation methods systematically undervalue companies with pre-revenue assets — and why it matters whether your buyer understands your sector
There is a category of valuation problem that standard EBITDA multiples are structurally incapable of solving. It appears whenever a company's value depends significantly on something that is not yet in the numbers — a pipeline product approaching commercialisation, a technology platform not yet launched, a regulatory approval that will unlock a new revenue stream. The EBITDA is real, but it reflects the cost of building the future without any of the revenue that future will generate. Apply a multiple to that EBITDA and you will systematically undervalue the business. This is not a theoretical problem. It happens in real transactions, with real consequences.
When Galderma went public in 2024, the company had a product in late-stage development called nemolizumab — a monoclonal antibody targeting atopic dermatitis and prurigo nodularis, with blockbuster potential. I was involved in this transaction, and the tension around valuation methodology was apparent from the inside. The IPO pricing was anchored on an EBITDA multiple applied to near-term projected EBITDA — which was heavily depressed by the development costs of nemolizumab, while none of the future revenue from the drug was yet visible in the financials.
The result was a structural mismatch between the valuation methodology and the nature of the asset. Investors who understood dermatology and the drug's clinical profile recognised that the IPO price essentially gave them nemolizumab for free — the existing business alone could justify the valuation, and the pipeline upside was unpriced. Investors without healthcare expertise saw a company trading at what looked like a full EBITDA multiple and moved on. The market eventually corrected: Galderma's share price rose significantly in the months following the IPO as the pipeline value became more visible.
A sum-of-the-parts DCF — valuing the existing business separately from the pipeline, with probability-adjusted revenue projections for nemolizumab — would have captured this. But in practice, many investors and even some advisors defaulted to the simpler EBITDA multiple approach. The ones who did the more rigorous work were rewarded.
A similar dynamic played out in a private transaction I observed in Europe. A large digital company in one market attempted to acquire a competitor in a neighbouring market. The strategic logic was clear — merge operations, consolidate capabilities, and create a pan-European platform. But the deal fell apart over valuation.
The acquiring company had recently built a proprietary technology platform that would fundamentally change how its core service was delivered across both businesses. The platform was complete but not yet launched. It had no revenue, no users, no track record. But it represented, in the acquirer's view, the core of the combined entity's future value.
The target company's shareholders looked at the acquirer's current financials — EBITDA depressed by the platform development costs, no incremental revenue yet — and valued it accordingly. The acquirer looked at the same business and saw a technology asset that would generate tens of millions in incremental revenue once deployed. The gap between the two valuations was so large that the parties could not agree on an exchange ratio. The merger never happened.
Both sides were being rational. They were just using valuation frameworks that could not accommodate the same asset. An EBITDA multiple said one thing. A DCF with scenario-weighted adoption curves said something entirely different. Without a shared analytical framework that explicitly valued the pre-revenue asset, there was no basis for agreement.
These are not edge cases. Any company whose value depends partly on something not yet generating revenue will face this problem. In healthcare, it is pipeline drugs, pending regulatory approvals, or new therapeutic indications. In consumer and beauty, it is new product lines in development, international expansion not yet launched, or a DTC platform being built. In technology-enabled businesses, it is a platform, a dataset, or a network effect that has been invested in but has not yet reached the inflection point where it shows up in the P&L.
The valuation method you choose is not a technicality. It determines what gets counted. An EBITDA multiple counts only what is already earning. A sum-of-the-parts approach — where the existing business is valued on its current earnings and the pre-revenue asset is valued on a probability-adjusted DCF — counts both. The difference between these two numbers can be 30%, 50%, or more. In the Galderma case, the market eventually priced in the difference. In the European digital company case, it prevented a deal from closing entirely.
The deeper issue is that the default valuation language in mid-market transactions is EBITDA multiples. It is what most founders, CFOs, and generalist advisors reach for first. It works well for stable, mature businesses where the P&L reflects the company's full earning potential. It breaks down the moment a meaningful share of the company's value sits in something that has not yet reached the income statement. And in sectors like healthcare, beauty, and consumer — where product development cycles are long and commercialisation requires significant upfront investment — that situation is more common than most people realise.
If your business has a significant pre-revenue asset — a product in development, a technology not yet deployed, a market entry not yet executed — you need to know two things before entering any transaction process. First, what your business is worth on a standard EBITDA basis, because that is the floor and it is where most buyers will start. Second, what the pre-revenue asset is worth under a rigorous, assumption-transparent DCF, because that is the value you will need to defend.
The gap between these two numbers is your negotiating challenge. If you cannot articulate it clearly — with explicit assumptions about timelines, probabilities, and incremental economics — you will be valued at the floor. The buyer may or may not understand your sector well enough to see the upside on their own. You cannot afford to rely on that.
There is a third option when the two sides cannot agree on the value of the pre-revenue asset: an earnout. Rather than arguing over what a pipeline product or unlaunched platform is worth today, the parties agree on a base price reflecting the current business and a contingent payment tied to the pre-revenue asset hitting defined milestones — a regulatory approval, a revenue threshold, a user adoption target. The seller gets paid for the upside if it materialises. The buyer does not overpay if it does not. In the European case described above, an earnout structured around platform adoption metrics could have bridged the valuation gap and saved the deal. It is not a perfect solution — earnouts create their own complexity around control, measurement, and incentive alignment — but when the disagreement is specifically about an asset that has no track record yet, it is often the most pragmatic path to getting a transaction done.
The valuation method is never neutral. It determines what gets counted and what gets ignored. If a meaningful part of your company's value has not yet reached the P&L, you need an analytical framework that captures it — before someone prices your business without it.
Bonneau Advisory — M&A Strategy for Consumer, Beauty & Healthcare