An offer is only as good as the number behind it, and the number a seller hands a buyer is almost never that number. The seller's ask is built on optimistic add-backs and a multiple borrowed from deals that don't resemble theirs. The buyer's job before the letter of intent is to rebuild the valuation from the book's own economics — and to express it as a multiple paired with a structure, not a single headline figure. Five steps do this, and the first is the one that protects against everything downstream.
§ 01 · The five stepsFrom EBITDA to a committed range.
| Step | What it does |
|---|---|
| Normalize EBITDA | Rebuild true earnings — haircut the seller's add-backs 20%–40% |
| Apply market multiples | Use multiples for sub-$3M independents, not public-rollup comps |
| Adjust for factors | Each upward/downward factor swings the multiple 0.5×–1.5× |
| Translate to structure | Split the price across cash, seller note, earnout, rollover |
| Build the LOI range | Set a range 10%–20% wide around the midpoint |
The workflow moves from the book's true earnings to a number a buyer can put in a letter. Normalizing EBITDA rebuilds real earnings from the seller's reported figures. Market multiples translate those earnings into an enterprise value — using comparables that actually match a sub-$3M independent, not the public-rollup multiples that price platform-quality businesses. Deal-specific factors then adjust the multiple up or down. The multiple becomes a payment structure. And the whole thing lands as a range, not a point. The single most important habit in the sequence is the haircut applied at step one.
§ 02 · The add-back haircutSellers over-add.
Apply a 20%–40% haircut to the seller's claimed add-backs before diligence even begins. Sellers systematically over-add — above-market owner comp, personal expenses run through the business, "one-time" costs that recur, related-party rent, family compensation, club dues. Modeling the cut up front means the diligence-stage reversal is a confirmation, not a shock that blows up the deal.
The add-back haircut is the discipline that separates a defensible valuation from an inflated one. Seven categories of add-back deserve scrutiny in particular: above-market owner compensation, personal expenses charged to the business, genuinely one-time expenses (which are rarely as one-time as claimed), related-party rent, family compensation, country-club dues, and above-market related-party arrangements. Contingency income is its own case — real but volatile, so it's valued as a separate category at a lower multiple than core commission revenue. Taking the seller's EBITDA at face value is the first of five classic valuation mistakes; the others are using the wrong comparables, ignoring structure in the multiple conversation, anchoring too early to a specific number, and setting the anchor off the seller's ask rather than an independent valuation. The forensic detail behind normalizing earnings is in normalized EBITDA.
§ 03 · Multiple plus structureVanity versus sanity.
The headline multiple alone is what the spoke calls the "vanity" number — "6×" tells a seller almost nothing about what they'll actually receive. The "sanity" number pairs the multiple with a structure: "6× with a 60/20/20 cash/note/earnout split." Four payment components carry typical bands — 50%–70% cash at closing, a 15%–30% seller note (often 5%–8% interest over three to seven years), a 10%–25% earnout, and 0%–20% rollover equity. A worked example makes it concrete: a $3M headline at 6× on $500K of normalized EBITDA might be structured as $1.8M cash (60%), a $600K seller note (20%, five-year, 6%), and a $600K earnout (20%, three-year retention) — which sanity-checks to a present value closer to $2.65M once the deferred and at-risk pieces are discounted. The multiple is the conversation starter; the structure is the deal. How to build the earnout itself is covered in drafting the earnout.
§ 04 · The LOI rangeTight enough to commit, wide enough for diligence.
The final step is expressing the valuation as a range, and the width is a judgment call with a rule of thumb: 10%–20% of the midpoint. Narrower than that risks locking a buyer into a number before diligence has confirmed it; wider signals uncertainty and makes a seller nervous about the buyer's conviction. The range goes into the letter with language tying it to diligence — anticipating a price in a stated band, subject to adjustment on completion of due diligence, carrier consents, and confirmation of the seller's financial representations. That phrasing is what preserves the buyer's room to move the number if diligence warrants it, and the specific triggers worth reserving are clear: material add-back reversals, carrier-consent failures above a threshold, liabilities beyond the seller's representations, material adverse change events, and lien-release failures. A valuation built this way — haircut, right multiple, real structure, disciplined range — is one a buyer can defend at the table and adjust honestly if the book turns out different than it looked. The full valuation framework lives in the valuation discipline pillar.
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Terminology on this shelf
- Five-step valuation
- Normalize EBITDA, apply multiples, adjust for factors, translate to structure, build the range.
- Add-back haircut
- A 20%–40% cut applied to the seller's claimed add-backs before diligence — sellers over-add.
- Vanity vs. sanity
- The headline multiple alone (vanity) versus the multiple paired with a payment structure (sanity).
- Four payment components
- Cash at closing 50%–70%, seller note 15%–30%, earnout 10%–25%, rollover equity 0%–20%.
- LOI range width
- 10%–20% of the midpoint — tight enough to commit, wide enough for diligence.
- Contingency income
- Real but volatile carrier income — valued separately at a lower multiple than core commission.