You Are Not Buying the EBITDA You Were Shown: Buy-Side Numbers That Decide Your Price

A seller shows you a business doing INR 20 crore of revenue and INR 4 crore of EBITDA, and asks for eight times. The negotiation that follows is almost always about the eight. It should be about the four. By the time you have agreed a multiple, the number it is applied to has already decided most of what you will pay, and that number frequently does not survive contact with the ledger. Buying well is less about negotiating skill than about arriving with four figures you can defend: adjusted earnings, the bridge from enterprise value to your cheque, normalised working capital, and the capex the business needs simply to stand still.

The earnings you are buying are not the earnings you were shown

Reported EBITDA in a promoter-run business is a management number, not an economic one. It reflects how the company was run for the promoter, not how it will run for you. Rebuild it on the basis of how the business will operate on day one under your ownership.

Work through the usual suspects with evidence, not assertion. Promoter remuneration off market. Rent paid to a promoter-owned property at a rate that will not continue. Related-party purchases at non-arm's-length prices. One-time revenue presented as recurring. Expenses capitalised that belonged in the P&L. Receivables over 180 days carrying no provision. Gratuity and leave encashment never provided for. Then reconcile the result to the GST returns and the filed tax computation; where the three do not agree, you have found either an adjustment or a liability.

Take the example above. Add back INR 40 lakh of promoter salary above market. Strip out INR 35 lakh of one-time revenue. Deduct INR 25 lakh because the promoter-owned premises are rented at half the market rate and the lease ends with the deal. Provide INR 30 lakh against aged receivables. Adjusted EBITDA is now about INR 3.5 crore. At eight times, that is INR 28 crore against the INR 32 crore on the table. You have moved INR 4 crore of price without once arguing about the multiple, and you have done it on ground a lender or an investment committee will accept.

Enterprise value is not the cheque: build the bridge first

Agreeing a multiple sets enterprise value. What leaves your account is equity value, and the distance between the two is where buyers get surprised. Build the bridge line by line before you put a number in writing.

Start with reported borrowings, then add everything that behaves like debt. Unpaid statutory dues, including GST, TDS and provident fund. Unfunded gratuity and leave liabilities. Promoter and related-party loans. Customer advances against orders you will have to deliver. Bills discounted with recourse, which frequently sit outside the net debt line but return to you if the counterparty does not pay. Disputed tax demands, assessed on probability rather than ignored. Capex already committed but unpaid. Lease liabilities on premises or equipment you intend to keep using.

Structure decides who inherits the rest. In a share purchase you buy the company and every historical liability attached to it, known and unknown. In a business transfer you buy defined assets and contracts and leave much of the history behind, at the cost of stamp duty, consents, licence transfers and a different tax outcome for the seller. Sellers prefer a share sale. If that is where you land, the price must reflect it and the indemnity package must carry what the price does not.

Working capital is a price term, not a diligence footnote

If you buy a business on a cash-free, debt-free basis and say nothing about working capital, you have handed the seller a lever. Collections get chased hard in the final quarter, creditors get stretched, inventory is not replenished, and the business arrives with a flattered closing balance sheet and a funding hole you discover in week two.

Fix a peg instead. Define normalised working capital as a twelve-month average rather than a closing figure, adjust for seasonality if the business has a season, and settle the price against that benchmark at completion. If the normalised level is INR 5 crore and the business is delivered at INR 3.8 crore, you are entitled to INR 1.2 crore of price adjustment, because that is what you will have to fund within weeks of closing.

Test the components, not only the total. Receivables collectible at ninety days and receivables collectible at two hundred days are not the same asset, even on the same line. Inventory that has not moved in a year is not working capital; it is a write-off waiting for your first audit.

Maintenance capex and the cash the business actually produces

EBITDA is not cash and it is not the basis on which you will service the acquisition. Run the business down to free cash flow before you commit to a price or a debt structure.

From the adjusted INR 3.5 crore, deduct maintenance capex, meaning the spend required to hold current capacity rather than the growth capex in the seller's plan. Say INR 70 lakh. Deduct the working capital the business absorbs as it grows, which for a company adding 15 percent on a sixty-day cash cycle is real money, say INR 40 lakh. Then tax, then interest on your acquisition debt. What survives has to cover your repayment schedule, and it is usually far smaller than the figure in the information memorandum.

Two tests follow from it. First, debt service coverage, which should hold with meaningful headroom in a year where revenue comes in ten percent below plan rather than only in the base case. Second, cash payback on your own equity, independent of any exit multiple. A deal that works only if you exit at a higher multiple than you paid is a bet on the market, not an acquisition.

Pay for the uncertainty you cannot resolve

Diligence will not close every gap. Customer concentration, a promoter who is the relationship with the top three accounts, a pending assessment, a contract up for renewal just after closing. None is a reason to walk, or to pay full price in cash at completion. They are reasons to structure.

Deferred consideration and earnouts move value into future performance, but only if the metric is defined precisely, calculated on a stated accounting basis, and insulated from decisions you will take after closing. Hold back ten to fifteen percent in escrow for eighteen to twenty-four months against general indemnities, and carve out uncapped specific indemnities for known tax exposures. Tie the promoter in with a transition period, an enforceable non-compete, and retention terms for the two or three people the business genuinely depends on. Price you cannot justify on today's numbers should be paid out of tomorrow's performance.

Before you table a number, put four figures on one page: adjusted EBITDA with every bridge item evidenced, net debt including everything debt-like, normalised working capital with the peg defined, and maintenance capex. If you can defend each of them to your board and to a lender, you are negotiating a price. If you cannot, you are accepting one, and the multiple you argued so hard about was never the thing that mattered.

Disclaimer

This article is for general information only and does not constitute financial, investment, tax, legal, or professional advice. The views expressed are for general informational purposes and should not be relied upon as a substitute for advice specific to your business or circumstances. Please seek appropriate professional advice before making any business, financial, investment, or transaction-related decision.