The Biggest Problem with EBITDA Multiples (And Why You're Being Undervalued)

The Blind Spot: Relying on the Multiplier

For ambitious entrepreneurs, the question of valuation often begins and ends with the EBITDA multiple. It is the most common and decisive method for established, profitable SMEs, based on the calculation: Enterprise Value = Adjusted EBITDA × Industry Multiple.

However, treating this figure as your guaranteed exit price is the most dangerous assumption a seller can make. The truth is that a buyer armed with comprehensive due diligence, will relentlessly challenge and deduct value from two critical areas: Adjusted EBITDA and the subsequent Enterprise-to-Equity Bridge. The core problem is that this method is typically backward-looking. Without proactive financial intelligence, you leave yourself vulnerable to a significant, surprise deduction, a financial flaw that can result in a 20-30% reduction in potential value during an exit.

Challenge 1: The Myth of “Adjusted” EBITDA

Buyers are not interested in the historical EBITDA figure; they are interested in Adjusted EBITDA, which represents the true, sustainable profitability of the business for the new owner. The negotiation over these “adjustments” is where significant value can be lost if you are unprepared. You must control the narrative of your own profitability.

The Two Most Vicious Adjustments Buyers Will Make

Buyers focus on proving that your reported EBITDA is artificially inflated. They seek to “normalise” your profitability by focusing on items that will either disappear or increase under their ownership:

A. Discretionary and Non-Recurring Expenses

Buyers scrutinise your P&L to find owner-centric or one-off expenses (like personal perks, excessive salaries, or one-off legal fees) that will not be present after the sale.

The Outrise Proactive Solution: Our continuous monitoring identifies and quarantines these expenses years in advance. We structure your financials to prove, with clear documentation, what your sustainable, normalised EBITDA truly is, removing the buyer’s leverage.

B. The Missing “Normalised” Costs

Buyers will add back costs that you, the owner, may have been absorbing but that a professional management team will have to pay. They will insist on deducting a market-rate salary for the roles you performed (e.g., Sales Director, CEO) if you were paying yourself below market rate, or challenge low operational expenditure on items like IT.

The Outrise Proactive Solution: We benchmark your operational costs against industry norms, proactively adjusting your EBITDA model to align with what institutional buyers expect, reducing the element of surprise.

Challenge 2: The Multiple Is Not Fixed

The Industry Multiple (e.g. 5x EBITDA) is not a market commodity. It is a reflection of risk and predictability. Buyers pay a premium multiple for a low-risk, highly predictable, forward-looking business. They apply a discount multiple to a business that is:

• Owner-Dependent: The business cannot run without the founder.
• Customer-Concentrated: A large portion of revenue comes from a single client, creating systemic risk.
• Reactive and Unpredictable: Lacks defensible, long-term cash flow projections.

Our Virtual CFO Service addresses these risks years in advance. We focus on structure, process, and early warning to increase your predictability and, therefore, your multiple.

Challenge 3: The Enterprise-to-Equity Trap (The Biggest Deduction)

Even if you successfully defend your Adjusted EBITDA, the biggest problem is the deduction that separates the Enterprise Value (EV) from your cash-in-hand equity value. This is the equity bridge, where buyers deduct net debt and implement the contentious working capital adjustment.

1. Debt and Debt-Like Items

The EV is paid on a “cash-free, debt-free” basis. All bank loans and overdrafts are deducted. Crucially, buyers also deduct “debt-like items”.

The Trap: These include significant accrued liabilities, unpaid expenses, or deferred income that the new owner will have to clear. Unprepared sellers are constantly surprised by how aggressively these items are valued and deducted.

The Outrise Proactive Solution: We provide predictive control and scenario planning to identify and minimise these debt-like items years before the sale, ensuring they do not reduce your final payout.

2. The Working Capital Deduction

Buyers demand a “normal” level of working capital be left in the business to ensure it continues operating smoothly post-acquisition.

The Trap: If the working capital in the business on the day of the sale is less than the historical average (the “target”), the buyer deducts the shortfall from the purchase price. This is often a last-minute deduction that catches founders completely off guard.

The Outrise Proactive Solution: Our continuous forecasting and decision confidence tools allow you to manage your cash flow and working capital actively against a pre-agreed target, eliminating this surprise deduction.

The Outrise Solution: Foresight Replaces Fear

Our strategic partnership is designed to tackle these three challenges head-on. We move the conversation from backward-looking compliance to proactive intelligence. This is the emotional payoff of our service:

• Less Stress, Less Worry: You eliminate the fear of a financial surprise or a last-minute negotiation deduction.
• Maximised Payout: Our disciplined preparation ensures that your financials are so clean and spot-on that due diligence is quick and easy, which removes the buyer’s incentive to “chip” the price.

Your Next Decisive Action

Stop letting a historical metric define your future wealth. The EBITDA multiple is merely a suggestion; your final equity value is the result of focused, multi-year strategic preparation. Don’t wait until the buyer is at the table to discover why your business is being undervalued. Take proactive control of your financials today.