Imagine a buyer has offered you a six-multiple on EBITDA in their initial letter of intent. Unfortunately, you don’t have clean financials that have been tested and scrutinized by an outside party. Once the buyer vets your financials, they uncover some adjustments they don’t agree with and revenue that was accounted for in the wrong period.
Now the buyer is still offering a six-multiple, but as they calculate it, the EBITDA is at $3.3 million, not the $3.8 million originally presented. That’s a $3 million adjustment ($500,000×6) on the valuation, or as we call it in the industry, a “haircut.” If your business has an enterprise value of $10MM+, we recommend you get a quality of earnings (QoE) report before putting your business on the market. A QoE report reviews the earning power of the business to determine those earnings are accurate and sustainable.