How AI is increasing Middle Market Company Value

Speaker A: Hello everyone, this is Steven White, founder and Managing Partner of opg, an independent international business valuation firm, um, providing valuations across the United States, into the Caribbean and down to South America. Our valuation services cover three specific areas, corporate ESOPs and estate and gift valuations. And you are listening to our uh, monthly podcast, Business Valuation Real Talk. You are all probably aware of the catchy phrase Orange is the new black. In fact it was so catchy they even created a successful television series. Well, if orange was the new black back then, I would say that artificial intelligence is the new competitive advantage. Today we can all agree that AI is not a new concept. In fact, AI has accelerated as one of the leading factors in how middle market company investors and buyers are looking at valuing privately held businesses. Which leads us to this month's podcast episode, how AI, uh, is increasing middle market company value. Now, whether it is a generative AI mla, which stands for machine learning applications or AI enabled productivity, these tools have influenced the financial and strategic drivers of uh, valuations. And quite honestly here at opg, it has literally reshaped the M M and A transaction dynamics. There was a great article that was written by uh, someone from Swiss Cyber Institute and it stated that AI was formally introduced back in the early 80s and back then it was really mainly utilized in manufacturing, aerospace sectors which I think we could all agree that those are some of the busiest global by volume in production. But here's the thing, going all the way back to the 80s when it was a rule based expert system. Since then, advanced machine learning, deep learning, generative AI, uh, basically have permeated fast paced global hubs like healthcare, now finance as well as transportation. And over the last two to three decades AI has certainly taken a life of its own in a variety of areas of our daily lives. For middle market companies I would say that it has become extremely evident for those that integrated into their company has seen significant value driver in their private company valuations. By having AI as an integration into their operation, it offers measurable financial and operational efficiency gains. And if you integrate integrated where you see gains in the financial operation, it leads to increased EBITDA margins and a higher valuation multiples. And lastly the integration of not just AI, but the presence of a proprietary AI asset. And a company can command significant valuation premiums by being valued as an intellectual property. And what that does is creating a competitive barriers to entry. Now the integration that jumps off the page or catches the attention of board of directors, CEOs, CFOs and business owners entrepreneurs is how can I integrate AI, uh, to become a value driver in our company. You see, years ago, prior to founding opg, I used to work for a firm called ubs. And every year we would have our um, our managers meeting or retreat and we would be given our KPIs. And KPI stands for key Performance Indicators. And during these annual meetings there, you know, they would be giving us a lot of different things. And I will say there are a number of things during my time at opg, uh, at UBS that stuck with me that I implement here at opg. But there was one thing in mind that really stuck with me and was a phrase that stated if it's measurable then it is important. And that particular phrase, we implement that here at opj. And the reason why I'm bringing this up at this point is that when private companies integrate AI into their operations, they often see measurable financial and operational efficiency gains. Now there was an analyst at uh, Privco. And Privco is a company that offers specialized financial intelligence and database platform that provides businesses and financial data on privately held and as well as non publicly traded companies. That particular study showed that companies using AI driven logistics enhancements achieved approximately 15% cost reductions, 35% inventory improvements and 65% service level gains. Now those efficiency gains increase the company's EBITDA ah, margins. And I shared EBITDA earlier and I just want to reiterate what that acronym stands for is Earnings before Interest, Tax, Depreciation and Amortization. Why is that multiple so important? Well, that multiple allows you to see how efficient your, your company is actually operating. But that EBITDA margins and, and, and, and the position for them is that if it's, it's a positive ebitda, then it is more attractive acquisition. So the reason for this is that buyers will pay a premium for businesses that demonstrate a sustainable cost reduction from AI integration. Of course I would even take this a step further by stating that this isn't just for the middle market companies because I believe that AI also enables smaller firms to leapfrog larger competitors with minimal capital outlay, minimal um, IT investment or even minimal new hires, resulting in tangible operating and financial results. And I would say here at opg, we're hearing, or better yet, we're having more and more conversations with clients around private equity firms making offers, uh, during their acquisition push. And recently there was a survey that was conducted by a firm called FTI Consulting. And after reading over this, the output of this survey, I found it to be extremely powerful because out of the private Equity firms that responded to the FTI Consulting survey, 59% of those private equity funds now view AI as one of the key drivers of value creation. And that's outstripping the traditional factors such as historical growth, consumer retention and cyclicality. Those are all still important. But if you actually have integrated AI into your overall operation and created more efficiency, based on the things that I mentioned earlier about cost, uh, reductions, the inventory improvements and your service level gains, those areas of AI being integrated in your company are things that private equity firms are looking for in a transaction. So to put this in a context, in a real life transaction, we had a large distribution company that we did evaluation for this particular distributing company, implemented AI into their overall operation and the outcome presented that the demand for forecasting improved inventory turnover by 15%. That increase in inventory led to an EBITDA increase, translating into a higher valuation multiple. And when I say a higher valuation multiple, it went from approximately 7% up to about 9.5% EBITDA. That is a significant jump. Just by integrating AI for their inventory. Imagine what would have happened if they'd have done a few other things. But we'll come back to that later. But the terms that are used in the AI space can sometimes be misleading or better, and I wouldn't say misleading, but they can be thrown around without truly having a clear understanding of the different types of AI. And just for clarification, there's a big difference between um, proprietary AI and native AI. Proprietary AI is often referred to as a closed source AI, which means a specific company or organization owns the underlying algorithms, the training data, as well as the model weights. So businesses use proprietary AI to securely process confidential data while protecting their intellectual property from being exposed to the public um, or open source training pools, which makes a lot of sense. The other side, which is the native UM AI means this is a product platform or an entire business was built from the ground up with AI as its absolute core foundation. And the benefit it allows for continuous adaptation, but more importantly, it gives you real time decision making. Those things are impactful. So companies that use um, either proprietary AI or native AI technology can potentially command significant premiums. That's essentially where I'm getting going with this, with the valuations. Unlike your traditional goodwill, AI assets can be valued as intellectual property, especially if they raise the barriers to entry from their competitors. Uh, let me also share another transaction, something that we've done here at opj, and it's also in the healthcare industry, we had this company that integrated AI into its operation in this Company with access to that had access to their own proprietary patient database. They what they ended up doing was securing a 12x revenue multiple in a PE deal because is data powered a machine learning engine that major competitors could not replicate. So it goes back to that command for significant premiums. Whether or not it's proprietary AI or native AI technology. These are real numbers of activity that's taking place in our marketplace right now. Now of course I am not recommending nor promoting any native AI technology, but what I will share with you is what the street thinks of native AI technology and some of these names you're probably familiar with, such as Anthropics. Anthropic's value climbed from 183 billion in September of 2025, followed a $13 billion Series F funding round. That's nearly a 3x increase from a 61.5 billion valuation in March of 2025. And so from a Street perspective, investors cited its explosive growth in AI driven enterprise transaction as justification for such a significant valuation jump. Another is that you're probably familiar with as well. OpenAI. OpenAI is reportedly in talk still to sell 6 billion in shares, potentially pushing its valuation to uh, uh 500 billion which would make it the highest value private equity company globally. A few others that you may or may not necessarily be familiar with unless you're really entrenched in the AI ah space. There's a Databricks which is a major, major AI power analytics firm. Their valuation reached 62 billion after a 10 billion funding round. Its forecasted revenue run rate and strong enterprise demand were cited as key factors for that uh, valuation growth. Open Evidence, which is a private uh, AI healthcare startup, increased its valuation from 1 billion following Series A in early 2025 to 3.5 billion by the middle of 2025 after a Series B rise attributed to the growth of client adop. Glean Technologies focused on enterprise AI search. Um, it attained a 7.2 billion valuation mid-2025 series. Its series F round off from 4.6 billion in 2024. And the last one, applied intuition, specializing in AI tools for autonomous systems rose from 6 billion valuation at 24 two years ago to 15 billion by the middle of June of 2025. So I, I'm going to use another example of healthcare because um, or I'm not going to use another example of healthcare because that was a recent transaction that we did and even though that was, was uh, one that showed a lot of impact when they made some adjustments and integrated AI um for the inventory. But there Are other industries out there that have integrated or adopted AI. Uh, and I want to share with you how it actually has impacted these industries. First is manufacturing distribution. Imagine a company that integrated AI. What it will do is enable predictive uh, maintenance, reduced downtime and capex reducing cash flow requirements and multiples increase when buyers can underwrite, lower future capital expenses, food and beverages. How does that help? Well, AI driven consumer insights platforms help mid market brands test new product launches at lower cost supporting faster growth projections. And what it does is provide a higher valuation. And the last one which is interesting, tech and SaaS, right? Well AI does fall into that particular area. But listen, firms embedding AI into its existing software are seeing valuations uplift up 40 to 100% compared to the non AI pairs. So as strategic buyers and private equity firms compete for unique assets, you're looking at tech and SaaS that have integrated AI increasing in value 40, 100% and, and by the way, something I should share and I'll be remiss if I didn't mention this, but the valuation can also be reduced by the risk of AI poses to existing business models. Now uh, for example, and especially in professional services firms like uh, basic tax prep, legal research or content production face potential downward pressure if AI can automate their service offerings. And by that happening investors discount their valuations where the risk of UH commoditization is essentially high. But if we look at this from a statistic standpoint or as I like to say, statistically speaking, one of the clearest signals in the data that we have found is that middle market companies that are using AI simply perform better. You see firms that report using AI are significantly more likely to see their revenue line increase over their prior year. So approximately 87% of AI adopters experience revenue growth compared to just 66% of the non AI firms. So if we look at this, this growth gap is not marginal. You see, AI using firms report an average year over year growth rate of uh, ah, a, let's just say 13% on par with the national average growth rate of 11.7% and more than double the 5.8% growth reported by firms not using AI. Uh, these numbers are real. So the challenge is the common narrative. I would say that AI adoption in the middle market is primarily about what labor substitution. Now what I will share is that AI appears to be enabling growth that requires more, not fewer people actually, and I will say this, that by integrating AI into a UH company's operation has shown that the stronger performance shows up in how Companies are investing in their people. In fact, 6 in 10 AI using firms increased their workforce in the past year compared to just 39% of the non AI firms. So if we look at our crystal ball and we start Looking forward, AI adopters expect their workforce to grow by 10% in the next 12 months, closely matching the national average of 9.2% versus 5% expected workforce growth in the firms that are not using AI. So in other words, I believe that this challenge, you know, this narrative that AI adoption in the middle market is primarily about labor substitution. I actually believe that instead AI appears to be enabling growth that requires more, not fewer people. But in order for this to really translate, to see the growth in your overall company, the growth of people is that more and more companies need to do training and education on AI. Uh, and even if m take a step further back, when you're in college learning more about AI, how AI can make your company even more efficient, AI is going to do whatever you teach it to do. So the more people that know and understand AI, uh, and how it can be incorporated in your respective industry shows more value to you. Now, AI adopters are also more active strategically. I would say that over the past year, going back to 2024, they were more likely to launch new products or services. And these are all statistic numbers that range from um, 2025, that 55% over 41% are more likely to launch new products. Those that expand into new domestic markets, the rate was 42% to 26%. And those who expanded internationally, like OPG going into South America, expanded internationally 21% versus 6%. And the last one, those that bought in new equity investments, that growth was 23% versus only 9% for the non AI users. Ultimately, the productivity growth is one of the largest things that I would say that the financial markets try to measure. Again, if it's measurable, it is important. So if the financial markets are trying to measure their productivity, essentially what they're doing is predicting how a company will perform in the long run because it will help assign a more accurate valuation of the company that they are looking at. And through AI, many of those firms are experiencing higher productivity. This higher productivity means lower production costs, higher potential output and an increase in long run earnings. All of these factors contribute to a higher valuation because it boosts the present value of, uh, the future cash flows. Now one of the most significant effects of AI is how effective it is at improving operational efficiencies. And we talked about that in the very beginning. Companies are using AI to automate time intensive tasks which can largely help with the decision making in a business practice. Now according to Eisner Abner, they stated that there is still a large gap between AI adopting firms and those that essentially have been lagging behind those that have refused to go into the AI or kind of tinkering in the AI space. And firms that have embraced AI tend to show higher revenue per employee, lower marginal cost, stronger earnings outlook. These are all core drivers of valuation. Meanwhile, firms that don't embrace AI uh are facing rising relative costs and outdated workflows. This contributes to the AI adopting firms earning higher valuation because they are more set up for the future in some sense. And I would say that investors seem to see that AI uh capabilities almost as like I said before, intellectual property and I think something intangible that they have that sets them apart from other private firms. So many investors view this skill as a long term pro for not just their companies, but inside their overall countries as well. This is where that term and analysts are calling an AI valuation gap. You are listening to Business Valuation Real Talk podcast. I am your host Stephen White, founder and managing partner of Onix Partners Group opg. We are a national business valuation firm providing valuations across the us, the Caribbean and into South America. And we're discussing in today's episode how AI is increasing middle market company value. Now AI, artificial intelligence, as we're all very well aware, is quickly becoming a very important tool for firms. And I would say throughout its use of AI, we've outgrown that terminology as it being just a technological tool because it is able to increase productivity now. And that increase in productivity then leads to an increase in valuation for the companies that are interested in exiting out or companies that are interested in acquiring another company that has that technology. It increases the valuation. And uh, here's the reality. AI is transforming how companies compete and how companies operate. And I mentioned before about the AI valuation gap. That gap is referring to companies either need to embrace AI or get left behind in an ever changing world. And as AI evolves, the firms that are able to effectively and efficiently use AI will capture the greatest gains in efficiency as well as market value. And those firms that hesitate, that are standing on the wall or standing on the side looking at everybody else zooming by them, what's happening is they are truly getting left behind and they're not really taking advantage of all the things that are at the disposal of how the efficiency and how effective AI has been utilizing their company. Those firms will risk falling behind because they weren't able to adapt. So in the future, the use of AI, uh, to simply, uh, unify or simplify grunt work won't just be useful, it will be essential for transversing the future in finance itself. So what I will like to leave you with is understanding that AI is no longer a distant concern reserved for the large companies. It has arrived as a practical, deployable tool that is already reshaping how businesses compete, how they operate, what, uh, acquirers are willing to pay for them, and for CEOs, board of directors, founders, entrepreneurs, how you are running your privately held business. The implications are real. So at your next business meeting or at your next manager's retreat, if AI is not at the top of your list, you could be one that we're referring to as the AI gap. So businesses that put AI ah, to work within the next few years are likely to command a higher valuation than their competitors, who hold off both in how strategic buyers assess them and in what they can achieve at the sale of a transaction. Because I'm here to tell you, because we work with private equity groups, we work with investment bankers, we work with corporate attorneys, but specifically the private equity buyers and strategic, uh, acquirers, as well as institutional lenders, they are already factoring in into their valuations, AI readiness into their due diligence process. And because they're doing that, so are we when we're doing our valuation of companies. And if you do not have that in your operation, then your valuation is going to result in a lower value than a company that does, plain and simple. Now, that window of ah, competitive advantage, as I mentioned, AI is the new competitive advantage is open today, but it won't stay open indefinitely. Thank you everyone for listening to our podcast. How AI is Increasing Middle Market Company Value. If you enjoyed this episode and you think you know of a company or that you know of someone that could benefit from this information, please download and share it with them or even recommend that they listen to this show or any of our past podcast episodes. Business Valuation Real Talk can be downloaded and heard on your favorite podcast platform anywhere you listen to podcasts. And as we close out this episode, I always like to say it's better to know what you don't know than to not know it all. Have a great day everyone. Until next month. Ram. Sam,