Jordan R. Kelliher

When do buyer come see the office, facilities, or warehouse?

Two things on this deal that tell me there was some risk to buying this business.

1) The earnout: most sellers aren’t a fan of earnouts because there is a possibility of never seeing that money. Additionally, you are most likely no longer the decision maker in the business which can be an issue with having to hit financial benchmarks.

Buyers will often times put earnouts in their structure when they are concerned with something. It’s a way of saying “I believe you, but let’s prove it first and then I’ll pay you”.

2) How long it took to get an offer: 172 days is a long time to get a signed Letter of Intent. It’s not crazy, but certainly on the long side. This tells me buyers were passing on this deal and hesitant to move forward for one reason or another.

My suggestion, is if you have the time and willingness to put the work in, is to pull it off market and fix the perceived risk.

Go back to market when it’s been resolved and the process will be quicker and most likely see more cash at close for what you built.

How do you value a business using EBITDA?

Start with EBITDA: earnings before interest, taxes, depreciation and amortization.

Then normalize those earnings for legitimate, non-recurring or discretionary expenses to calculate Adjusted EBITDA.

From there, a valuation multiple can be applied to Adjusted EBITDA to estimate the enterprise value of the business.

For example:

$2M Adjusted EBITDA × 5x multiple = $10M valuation

But the multiple isn’t automatic. Industry, growth, customer concentration, owner dependence, management, margins, revenue quality and dozens of other factors can influence what buyers are willing to pay.

EBITDA tells you what the business earns. The multiple tells you what buyers are willing to pay for those earnings.

These 3 tests can give you a quick look at how a potential buyer may view the risk in your company.

1. Pull a sales by customer report and look for customer concentration. (Ideally want your top customer under 25%)
2. Take the 30-day vacation test, what still requires you to be there?
3. Review your EBITDA add-backs, can you clearly explain and document why a buyer won’t incur each expense after closing?

These three tests won’t tell you everything about whether your business will sell or what it’s worth. Industry, growth, margins, management, recurring revenue, financial quality, deal size and other factors all matter.

But they can quickly expose three things buyers pay close attention to when evaluating a business acquisition: customer concentration, owner dependence, and quality of earnings.

A buyer isn’t just asking, “How much EBITDA does this business generate?”

They’re also asking, “How much risk am I taking on to keep generating it after the owner leaves?”

A more accurate timeline to expect is 6-8 months. This could have been for a variety of different reasons and can happen, but very uncommon at this size.

For example, the past 5 businesses we have sold average around 4.5 months from start to finish.

When a business is positioned well and ready to sell, the business will sell quickly.

More profit doesn’t automatically mean a higher multiple.

Buyers also price in risk.

Owner dependence, customer concentration, management, revenue quality, growth, margins, and clean financials can all impact what a buyer is willing to pay.

Two businesses can generate the same EBITDA and sell for very different multiples.

Earnings tell buyers how much you make. Risk helps determine what those earnings are worth.

Selling your business doesn’t always mean you’re done with it.

Earnouts and rolled equity can keep millions of your dollars tied to the business long after closing.

There’s nothing inherently wrong with either, but understand the financial strings attached before you sign.

The highest offer isn’t always the cleanest offer.

A $10M offer for your business does not necessarily mean $10M hits your bank account.

One of the most common structures in lower-middle-market M&A is a cash-free, debt-free transaction.

In simple terms, the buyer is agreeing to purchase the operating business at a certain enterprise value, assuming the company is delivered without excess cash and without debt.

The seller generally keeps the company’s excess cash.

But the seller is also responsible for paying off the company’s debt at closing.

For example:

Your business sells for $10M.

The company has $1M of cash and $2M of debt.

Ignoring taxes, fees, working capital adjustments, and other closing items for simplicity:

$10M purchase price
+ $1M cash retained by seller
– $2M debt payoff
= $9M to the seller

This is why understanding the difference between enterprise value and equity value matters when selling your business.

A buyer saying your company is worth $10M doesn’t automatically mean you’re walking away with $10M.

And on the other side, having $1M sitting in the company’s bank account doesn’t necessarily mean you’re giving that $1M to the buyer for free.

The headline purchase price is only part of the equation.

One of the biggest misconceptions in business valuation is that every company within the same industry should trade at roughly the same multiple.

It doesn’t work that way.

Two businesses can operate in the exact same industry, generate similar revenue and produce similar earnings and still have very different valuations.

Why?

Because buyers aren’t just buying earnings. They’re underwriting the risk of those earnings continuing after the owner leaves.

Customer concentration, owner dependence, management depth, recurring or predictable revenue, financial reporting, growth trends, margins, contracts and overall transferability can all impact how a buyer views the business.

Industry benchmarks can be useful as a reference point, but they don’t determine what your specific company is worth.

The businesses that command premium valuations are typically the ones where a buyer can look at the operation and have confidence that the earnings will continue under new ownership.

If you’re thinking about selling, don’t just focus on increasing profit.

Focus on building a business someone else can confidently own

👇A business with $1.5M in EBITDA selling for 9x is a GREAT outcome.

But it’s not the norm.

At that size, many businesses will trade closer to the 4–7x range depending on the industry, growth, risk profile, and quality of the company.

So how does a business get someone to pay 9x?

It usually takes a combination of factors:

• Strong, consistent organic growth
• Recurring or highly predictable revenue
• Low customer concentration
• A management team that can operate without the owner
• Clean, defensible financials
• Strong margins and cash flow conversion
• Limited CapEx requirements
• An attractive or highly fragmented industry
• Multiple buyers competing for the deal

Size matters too.

As EBITDA grows, higher multiples generally become more achievable because the buyer pool changes.

A business producing $1M–$2M of EBITDA may attract individual buyers, search funds, family offices and smaller PE groups.

At $3M–$5M+ EBITDA, you start attracting significantly more institutional capital.

At $5M–$10M+ EBITDA, 8x, 9x and even 10x+ outcomes become much more realistic for high-quality companies.

But there’s another important factor: strategic value.

A buyer might pay 9x your EBITDA because they can create synergies after the acquisition.

If you’re producing $4M of EBITDA and the buyer believes they can eliminate $1M of duplicate expenses, a $36M purchase price is:

9x your EBITDA

But only 7.2x their expected $5M of pro forma EBITDA.

That’s why simply hearing that “a company sold for 9x” doesn’t tell you the whole story.

You need to know the size, industry, growth rate, customer concentration, management structure, deal structure, buyer type and strategic rationale.

And sometimes there’s one more ingredient:

Competition.

If one buyer wants your company, you have an offer.

If six qualified buyers want your company, you have a process.

That competition can be the difference between a good multiple and an exceptional one.

The goal isn’t to convince the market your business deserves 9x.

It’s to build and position a business that gives buyers a reason to pay it.

— Kelliher Acquisitions