Community Spotlight

Q&A: John Langston on Why the First EBITDA Number Can Shape the Entire Deal

When an owner sends unadjusted financials directly to a buyer, the first valuation may be based on earnings that exclude legitimate add-backs or include misclassified expenses. John Langston, founder and CEO of Republic Capital Group, describes this as “imprinting.” Once the buyer has formed an initial view of the company’s EBITDA, correcting that view later can be difficult. Langston says that research for his book, 24% More, found that professional investment bankers increased transaction prices by an average of 25.3%.

The problem begins before formal diligence. Raw financials may include owner expenses, one-time costs, inconsistent classifications, or revenue that is not clearly presented. If those records imply $1 million in EBITDA and later analysis supports $1.3 million, the seller must persuade the buyer to replace the lower figure. The difference can flow directly into valuation, especially when the purchase price is calculated as a multiple of adjusted EBITDA.

The financial package should therefore be prepared before it reaches a buyer. The process includes reviewing recurring and nonrecurring expenses, calculating adjusted EBITDA, documenting each add-back, and organizing the supporting records in a data room. A sell-side quality-of-earnings report may also be useful for larger companies, businesses with complicated revenue streams, or transactions involving institutional buyers. Companies with simple and independently verifiable revenue may require less upfront work.

The seller wants the buyer to understand the company’s normalized earnings. The buyer is looking for risks that affect valuation. Unsupported add-backs, unclear revenue recognition, or inconsistent monthly reporting give the buyer room to reduce EBITDA. Once that lower figure is multiplied across the agreed valuation multiple, a relatively small accounting issue can create a much larger reduction in price.

Competition can expose how buyers value the business. In one transaction, the seller received two offers for $116 million and $84 million, a $32 million difference. The buyers had different strategic priorities, integration assumptions, and return requirements. Langston says a 20-30% spread between the highest and lowest offers is common in a competitive process.

The $116 million bidder initially required the seller to abandon its name and website immediately after closing. The seller considered the website commercially important and wanted to challenge the requirement early. The issue was deferred until the parties had resolved larger transaction points. When the buyer later asked its own team to prepare the migration plan, the team concluded that the website could not be replaced for at least 18 months, possibly two years.

Process management also affects company performance. A sale can take eight months, and an owner who handles buyer outreach, due diligence, negotiations, and document requests may have less time to run the business. If revenue or earnings decline during that period, buyers may revisit the forecast, increase diligence, or reduce their offers. A company can therefore lose value during the process even when its long-term position has not materially changed.

The practical starting point is to control the first financial package. Before sharing statements with a potential buyer, reconcile the accounts, calculate adjusted EBITDA, document every add-back, and decide whether a sell-side quality-of-earnings review is warranted.

Governance Feed

1. SBA SOP 50 10 8.1 will require an independent quality-of-earnings report for business acquisitions priced above $3 million that receive an SBA loan number on or after October 1, 2026. Credex Advisors estimates that roughly 1,000-1,400 SBA 7(a) transactions could fall under the rule each year. In FY2025, the SBA approved 7,533 change-of-ownership loans, including 1,355 loans of at least $2.1 million, the lowest estimated loan size that can support a $3 million acquisition.

2. Axial’s analysis of 100 executed lower-middle-market LOIs found that 71% of transactions were priced at 3x-7x EBITDA. The median multiple was 4.88x, with the middle 50% ranging from 4.13x to 6.25x. Deal structure was as important as the headline valuation: seller financing appeared in 53% of LOIs, earnouts in 42%, and rollover equity in 40%, while only 11% provided all cash at closing. Private equity funds recorded the highest median multiple among buyer types at 6.13x, compared with 5.88x for corporations and 4.00x for individual investors.

3. Financing conditions tightened after the Federal Reserve raised its policy rate by 25 basis points on September 16, its first increase in three years. The two-year Treasury yield subsequently reached 4.741%, its highest level since July 2024, while the ten-year yield approached 5%. Higher base rates flow into acquisition debt pricing and can reduce the leverage available for lower-middle-market transactions. Buyers may respond by contributing more equity, increasing seller financing, or reducing purchase multiples to maintain required returns and debt-service coverage. Markets are pricing the possibility of another one or two rate increases before year-end.

Thesis Principle

Entity conversions change how a sale is taxed. Converting from a C corporation to an S corporation triggers a 5 year recognition period during which built-in gains remain taxable at corporate rates. A sale inside that window exposes appreciation that accrued before the conversion to corporate-level tax before any shareholder-level tax applies. Conversion requires 2 to 5 years of runway before a sale to be effective. An owner who starts thinking about entity structure after a buyer surfaces has already lost the option. That is why tax planning for an exit begins years before a contemplated sale.

Resources & Events

📅 M&A Success Summit 2026 (Denver, CO - October 7, 2026)

The third annual summit brings together middle-market owners, buyers, attorneys, investment bankers, lenders, and transaction advisers. Sessions will cover company valuation, value creation, exit preparation, acquisition strategy, financing, legal risk, and transaction due diligence. The program opens with a dealmakers roundtable examining the operational and financial factors that increase enterprise value. Buyer-seller discussions will address deal structuring, negotiation, employee retention, post-close integration, and lessons learned from transactions.

📅 Business Owner & Trusted Advisor Summit (West Palm Beach, FL - November 12, 2026)

ACT Capital Advisors will examine how middle-market owners can prepare a company for sale and improve its position before entering the market. The session covers exit timing, seven operational and financial value drivers, and the factors buyers use to underwrite valuation. It will also assess changes in the buyer landscape and their effect on transaction structure, pricing, and terms. Attendees will learn how to build a 12-18-month preparation plan using insights from more than 250 completed transactions worth over $2.5 billion.

📊 Report Spotlight: Business Services Industry Q2 2026 (Dinan)

Dinan’s Business Services Industry Report Q2 2026 recorded 540 Business Services M&A transactions, up 1.7% from Q1 2026 and 6.7% from Q2 2025. Valuations varied significantly across subsectors, with Environmental & Facility Services at 15.8x EV/EBITDA, Real Estate Services at 14.4x, Human Capital & Staffing at 11.6x, Risk & Insurance at 10.6x, and Consulting & IT Services at 10.2x. Dinan’s Business Services Index stood at 11.7x EBITDA, compared with 18.3x for the broader market. Human Capital & Staffing grew by 10.1% in Q2, while Consulting & IT Services declined by 11.4%.

For the Commute

Bridging the M&A Gap in the Lower Middle Market (S&P Global)

Paren Knadjian, partner at Eisner Advisory Group, examines deal activity among companies with $2 million to $25 million in EBITDA and enterprise values of $20 million to $250 million. Higher borrowing costs have widened the valuation gap, while tariffs and other cost uncertainties are extending due diligence and delaying closings. Knadjian explains how earn-outs, seller notes, deferred payments, and structured equity can bridge disagreements between buyers and sellers, noting that private equity holds an estimated $1 trillion in dry powder. Blue-collar services such as HVAC, plumbing, and electrical businesses remain particularly active because buyers see less immediate exposure to AI disruption.