Big Story

What Buyers See Beyond EBITDA

Key Takeaways

• Most owners think about performance in terms of cash. Buyers usually value the business using EBITDA. The difference between those two numbers can affect the price, financing, and the amount of cash a seller receives at closing.

• EBITDA does not account for several uses of cash that continue after an acquisition. These include equipment replacement, working capital, debt payments, and taxes. A business can report strong EBITDA and still produce much less cash for a new owner.

• Starting October 1, the minimum debt service coverage ratio for an initial acquisition rises from 1.15x to 1.25x. Historical or adjusted earnings must support the debt. Future projections cannot be used to make up a shortfall..

Most lower-middle-market businesses are valued using EBITDA, which measures earnings before interest, taxes, depreciation, and amortization. Buyers use it to compare businesses without the effects of financing, taxes, and the current owner's accounting choices.

In the second quarter of 2026, businesses selling for between $5 million and $50 million traded at an average multiple of 5.8x EBITDA, according to the IBBA and M&A Source Market Pulse. That was the highest level for the segment since the first quarter of 2022. A company with $1 million in EBITDA might therefore support a valuation of around $5.8 million before adjustments for debt, cash, working capital, deal structure, and other factors.

The problem is that the costs excluded from EBITDA must still be paid after the sale. Equipment is one example. Depreciation is an accounting charge based on an asset's expected useful life. Maintenance capital expenditure is the actual cash the business spends replacing trucks, machinery, computers, refrigeration equipment, tools, and other assets needed to maintain current operations. Those two figures can differ significantly, especially in businesses that rely heavily on equipment.

A company might report $150,000 in annual depreciation while spending $300,000 each year on equipment replacement. EBITDA does not reflect the $300,000 cash requirement, but the buyer must still fund it. If that spending has been inconsistent or poorly documented, the buyer will usually build an estimate during diligence. That estimate can reduce the cash flow available to service acquisition debt and affect the price the buyer is willing to pay. 

Working capital creates another difference between reported earnings and available cash. A distributor might generate an additional $1 million in sales but need an additional $200,000 in inventory and $150,000 in receivables to support that growth. Buyers pay close attention to this because they need enough working capital to operate the company after closing. If the company has historically required more working capital than the buyer expected, this can affect both the purchase agreement and the deal's economics.

Debt service is where the difference becomes especially important for financed acquisitions. A buyer does not repay acquisition debt with EBITDA. The buyer makes principal and interest payments using cash generated by the business. The SBA rules taking effect on October 1 place more weight on that. For initial acquisitions and owner buyouts, the minimum debt service coverage ratio increases from 1.15 to 1.25. Business expansions remain at 1.15 times. 

The required coverage must also be supported by historical or adjusted earnings. A buyer cannot rely on an optimistic post-closing growth plan to qualify for financing. The business must demonstrate that it already generates sufficient cash flow to support the proposed debt. That matters because many lower-middle-market acquisitions rely on debt to finance a large portion of the purchase price.

EBITDA is calculated before taxes, but the new owner still pays taxes on the income generated after the acquisition. Those payments use the same pool of cash that funds debt service, equipment replacement, working capital, and distributions to the owner. The exact amount depends on the transaction structure, depreciation, interest deductions, the buyer's tax position, and other factors. It still has to be included when the buyer decides how much cash the company can actually produce after the acquisition. 

None of this makes EBITDA a poor valuation metric. It remains the standard language for lower-middle-market transactions because it allows buyers and sellers to compare businesses with different financing structures and ownership arrangements. The limitation is that EBITDA does not show the amount of cash available after the company pays for everything required to keep operating. 

In the second quarter, cash at closing accounted for roughly 83% to 92% of the total consideration, so financing capacity directly affects what a seller can receive. Owners can prepare by separating maintenance from growth spending, keeping several years of capital expenditure records, tracking working capital patterns, and reconciling adjusted EBITDA with tax returns, financial statements, and bank activity. They should also know which add-backs are likely to be accepted in a quality-of-earnings review.

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Governance Feed

1. In Q2 2026, 87% of deals above $5 million received at least three offers, and 33% received 10 or more bids, according to the latest IBBA/M&A Source Market Pulse survey. Valuation multiples for businesses in the $5 million-$50 million purchase-price range increased from 5.5x to 5.8x, the highest level since Q1 2022. Roughly three-quarters of advisors said sellers currently have the advantage in the $2 million-$50 million market, although lower-middle-market transactions are taking about 12 months to close.

2. New SBA 7(a) rules taking effect October 1, 2026 keep the standard acquisition down payment at 10% but raise the debt-service coverage requirement to 1.25x from 1.15x for initial acquisitions and owner buyouts. Deals with a business purchase price of $3 million or more will require an independent Quality of Earnings report, and every change-of-ownership loan will require an outside valuation, removing the current $250,000 internal-valuation exception. The streamlined 7(a) Small program will also stop covering acquisitions of $350,000 or less.

3. Median U.S. middle-market valuations reached 6.9x adjusted EBITDA in Q2 2026, up from 6.5x in 2025. Businesses valued at $10 million-$25 million sold for a median 5.7x EBITDA, compared with 7.6x for $25 million-$50 million deals and 9.4x for $50 million-$200 million deals. Private equity buyers were particularly aggressive on the smallest add-ons, even though corporate buyers completed nearly twice as many transactions overall. For owners, the data shows how sharply multiples increase once a company moves beyond the smallest end of the lower middle market.

4. Family offices are bypassing traditional PE fund investments and buying lower-middle-market companies directly, including building their own acquisition platforms for follow-on deals. That gives owners another buyer category alongside private equity, strategics, search funds, and independent sponsors, and one that can operate with longer holding periods and different return requirements. The shift also increases competition for founder-owned companies, as more family offices seek investments.

Thesis Principle

The transition services agreement specifies how much time you must provide the buyer after the deal closes. Duration typically ranges from 30 to 90 days for Main Street businesses and from 3 to 6 months when operations or technical systems are complex. Specify hours per week because open-ended availability breeds resentment on both sides and leads to disputes. The first 30 to 60 days are usually included in the purchase price, with market-rate compensation beyond that commonly ranging from $150 to $400 per hour. The agreement should also make clear that you are supporting the new owner without directing employees, contacting customers, or making operating decisions.

Resources & Events

📅 M&A East 2026 (Philadelphia, PA - October 20-21, 2026)

M&A East returns to the Pennsylvania Convention Center for a day and a half of programming built around middle market transactions. Hosted by ACG Philadelphia, the conference draws roughly 1,100 dealmakers, including capital providers, intermediaries, deal advisors, and strategic acquirers, with structured one-to-one meeting scheduling through ACG Access and DealSource alongside speaker sessions on current market conditions. Details →

📅 Minnesota Carlson ETA Conference (Minneapolis, MN - November 13, 2026)

The Carlson School of Management hosts a one-day program on entrepreneurship through acquisition, covering thesis development, running a search, conducting due diligence, structuring a transaction, and operating post-closing. A dedicated portion of the agenda addresses deal financing and the respective roles of debt, equity, lenders, and investors. The audience includes aspiring searchers, current business owners, lenders, brokers, and advisors. Details →

📊 Report Spotlight: Private Equity Mid-Year 2026 Report (CohnReznick)

U.S. private equity firms completed 3,999 deals and deployed about $314 billion in the first half of 2026, but activity slowed from 2,191 transactions in Q1 to 1,808 in Q2 as buyers became more selective. Median EV/EBITDA multiples fell to 13.4x from 14.6x in 2025, while the median EBITDA of acquired companies reached $64.5 million in Q2, showing that capital is concentrating in larger, more durable businesses. Exits remain the main constraint, with 872 PE-backed exits in the first half, down from 1,210 a year earlier. CohnReznick expects infrastructure tied to AI, healthcare, professional and technical services, precision manufacturing, workforce training, and specialized trades to attract capital through the rest of 2026. Read →

For the Commute

Dane Pan Gave Up 4x to Get 100% Cash (Built to Sell Radio)

Dane Pan and his wife built Monet Brands, an Amazon skincare business, to $1.3 million in annual revenue with just two employees and a flagship product that sold for $24.99 and cost $6.10. When they put the company up for sale in 2025, four qualified buyers submitted offers ranging from roughly 2x to 4x SDE. Pan rejected the highest offer because part of the purchase price depended on future performance and instead accepted 3.6x SDE with 100% cash at closing, plus inventory valued separately at cost. The episode breaks down how sellers should compare cash with earnouts and holdbacks, reduce expenses before a sale, and decide which business dependencies are worth fixing before going to market.