Financial criteria — affordability and the true cost.

Financial criteria are the affordability filter that runs first, because there's no point diligencing a target a buyer can't fund. The down payment is 10–25% of price in liquid cash, and a useful rough anchor is that $200K of cash with a 20% down payment supports about a $1M maximum purchase. Beyond the down payment, a buyer needs a 3–6 month working-capital float to cover operating expenses while carrier commission transfers finalize post-close. But the affordability question has two parts the sticker price hides: the normalized earnings the price should be measured against, and the true all-in cost the price understates.

§ 01 · Normalizing the earningsThree add-back categories.

Normalized EBITDA is what the multiple actually applies to, and getting there means adding back the expenses that won't continue under the buyer. A worked example: $100K of net profit plus a $15K owner personal vehicle, a $5K non-working-spouse salary, and an $8K one-time legal cost normalizes to $128K. The three add-back categories — discretionary owner expenses, non-recurring costs, and inflated compensation — are where the real earnings power hides in a small agency's books. A buyer who applies a multiple to reported net profit rather than normalized EBITDA undervalues the target; the normalization is the step that reveals what the buyer is actually buying. A 25%+ normalized-EBITDA margin is a useful minimum filter — it screens out turnarounds that need an operational rescue.

§ 02 · The true all-in cost15–25% over the sticker.

The true-cost premium is the number that catches under-prepared buyers. The sticker price is the headline; the all-in cost adds the legal and professional fees (M&A attorneys, tax advisors, accountants at $10K–$30K), the data migration ($5K–$15K of consulting, mapping, and validation), the working-capital float, and any technology remediation. Budgeting 15–25% over the sticker isn't conservatism — it's the realistic number, and a buyer who models it can structure the capital while one who models only the price discovers the shortfall at closing.

§ 03 · The multiple disciplineWritten, shared, held.

The financial filter's hardest discipline is the multiple ceiling, because it's the one competitive pressure attacks. PE-backed buyers bid in a 10–12× normalized-EBITDA range, which an independent buyer usually can't and shouldn't match — the independent's disciplined maximum is 6–8× EBITDA. The discipline is to write that ceiling down and share it with the lender as a guardrail against the winner's curse, so that when a PE bidder offers 11× and the independent's math says 7×, the answer is to walk rather than chase. The written, shared ceiling is what converts the multiple discipline from a good intention into an actual constraint — a number on paper a buyer committed to before the auction makes overpaying a visible breach rather than a quiet rationalization.

§ 04 · The filter in practiceAfford, normalize, cap.

In practice the financial filter runs three checks in sequence: can the buyer fund the down payment and the all-in cost (not just the sticker), what does the target actually earn once the seller's add-backs are normalized out, and does the price clear the written multiple ceiling. A target that fails any one is rejected at the filter stage, before diligence spend. The filter's value is exactly that it rejects cheaply — a buyer who runs it enters every negotiation knowing their affordability ceiling, their normalized-earnings basis, and their walk-away multiple, which is the financial half of the discipline that separates a credible acquirer from a deal-fever casualty. The deeper valuation mechanics live in valuation discipline.

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