Hi, welcome to Valuation Podcast, where we explore the ideas, strategies, and market forces shaping business valuation and mergers and acquisitions. I’m Melissa Gragg, a financial mediator and business valuation expert in St. Louis, and today I’m joined by Nick Avaria for a conversation about artificial intelligence, mergers and acquisitions, and the economics of what comes next. Nick brings a unique perspective to this discussion through his background in business, finance, and entrepreneurship, including buying and selling seven marketing agencies. Together, we explore why AI-driven profitability may not always translate into long-term business value, how rising technology costs and changing customer expectations could reshape company margins, and why eliminating employees too quickly may weaken a company’s ability to adapt. We also discuss how business owners can use AI more strategically, preserve their intellectual property, and build a culture of innovation. One of the biggest questions facing business owners and buyers today is whether a company’s current financial performance is sustainable. In this episode, we examine why people, leadership, adaptability, and the ability to create something genuinely new may matter more than short-term earnings when evaluating an acquisition. We also explore how AI can serve as a thought partner, improve operational efficiency, and help businesses develop products and services that were previously impossible. My goal is to help business owners, executives, and prospective buyers think more critically about AI, understand the risks behind extraordinary profit margins, and prepare for a rapidly changing M&A landscape. Key Takeaways 1. High AI-Driven Profit Margins May Not Be Sustainable AI can help businesses reduce labor costs and increase output, sometimes producing exceptionally high EBITDA margins. However, competitors may adopt similar tools, customers may demand lower prices, and AI token costs may rise. Short-term profitability does not automatically indicate long-term financial strength. 2. Business Valuation Must Consider More Than Current EBITDA A company’s current earnings may not reflect its future earning potential or risks. Buyers should examine whether profitability depends on temporary cost savings, reduced staffing, founder expertise, or systems that competitors can easily replicate. Sustainable earnings and future resilience are essential considerations. 3. People and Innovation Are Critical to Long-Term Business Value AI does not eliminate the need for leadership, judgment, creativity, and change management. Companies with adaptable teams and a culture of innovation may be better positioned to respond to market changes. Buyers should evaluate leadership quality, employee capabilities, and the organization’s history of adapting to new technologies. 4. AI Should Support Human Judgment Rather Than Replace It AI can provide a useful thought partner, automate repetitive administrative work, and help businesses analyze information. However, strategic decisions require human expertise, critical thinking, and oversight. Nick recommends incorporating AI into defined workflows, with human review between important steps to identify errors before they spread. 5. Sustainable Competitive Advantage Comes From Creating New Value Businesses may gain a stronger competitive position by using AI to develop products, services, and capabilities that were previously impossible. Rather than focusing exclusively on short-term cost reductions, companies should invest in intellectual property, talent, innovation, and the ability to pivot as markets evolve. These capabilities may strengthen long-term business value and acquisition potential. Q&As from episode Q1. How is artificial intelligence changing business valuation and mergers and acquisitions? Artificial intelligence is changing business valuation and mergers and acquisitions by affecting operating costs, profit margins, workforce needs, competitive advantages, and future earnings sustainability. Although AI may increase EBITDA in the short term, buyers must determine whether those profits can continue as competitors adopt similar technology and customers demand greater value. Businesses with strong leadership, adaptable teams, and differentiated intellectual property may be better positioned for long-term success. Q2. Are high EBITDA margins created by AI sustainable when selling a business? High EBITDA margins created by AI are not necessarily sustainable. They may reflect temporary labor savings or efficiencies that competitors can replicate. As AI adoption increases, market competition may reduce prices, customers may absorb some of the productivity gains, and technology costs may change. Buyers should evaluate the durability of earnings, reinvestment in the business, staffing levels, customer relationships, and the company’s ability to innovate before determining an appropriate valuation multiple. Q3. What should buyers look for when acquiring a company that relies heavily on AI? Buyers should assess how the company uses AI, whether its competitive advantage is defensible, and how dependent its results are on the founder or a small number of key employees. They should also examine the company’s innovation culture, leadership capabilities, employee retention, customer relationships, technology costs, and ability to adapt when market conditions change. A strong acquisition candidate should demonstrate more than high current profitability; it should have a credible path to sustaining and developing its competitive position. Q4. How can business owners use AI without losing human expertise and strategic control? Business owners can use AI effectively by automating repetitive administrative tasks, improving data movement between systems, and using AI as a thought partner for research and analysis. Strategic decisions should remain grounded in human judgment and industry expertise. Businesses should establish workflows that define which tasks AI performs, where human review is required, and how errors are detected. Owners should also learn enough about AI capabilities to guide technical teams and evaluate whether an implementation delivers measurable business value. Q5. How can AI affect the future value and sale price of a business? AI can increase a business’s value when it creates sustainable efficiencies, defensible intellectual property, differentiated products, or capabilities that competitors cannot easily reproduce. However, high short-term profits alone may not justify a premium valuation multiple if the business has reduced its workforce, underinvested in innovation, or become vulnerable to rapid market changes. Buyers may place greater emphasis on earnings sustainability, leadership, adaptability, and competitive differentiation when determining what a company is worth. The appropriate valuation ultimately depends on the business’s specific circumstances, risks, and market evidence. Nick Avaria https://agencyacquisitions.io/ https://www.linkedin.com/in/nickavaria/ Melissa Gragg https://www.valuationmediation.com/ https://www.youtube.com/@BusinessValuationStL Support the show
