EBITDA Volatility and Pricing

searcher profile

April 10, 2025

by a searcher from University of Connecticut in West Newbury, MA, USA

I am evaluating an HVAC purchase and it's had a jump in EBITDA in 2024, and I'm curious how to price it accordingly. For example, EBITDA went from $575k, to $625k, to $1.045mm in 2022, 2023, 2024 respectively.

Would you take a T3 blended approach and apply a relative multiple to it?

It does seem like there are valid changes in the business that have led to this, mostly from an efficiency standpoint, but it would be risky to only use 2024 for the purposes of valuation multiples.

Any advice would be greatly appreciated.

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commentor profile
Reply by a searcher
from University of Wisconsin in Denver, CO, USA
I would personally value off of the T3 average, but include a performance-based, partial standby (I/O) seller note based a valuation at the full $1.045M that is reduced (forgiven) in part or whole based on the company achieving that $1.045M again in###-###-#### potentially 2026 too).

Adds complexity, but gives them the opportunity to earn what they think it's worth and protects you in the case it doesn't repeat.
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Reply by an intermediary
from The Johns Hopkins University in Gainesville, FL, USA
I like ^redacted‌'s comment. From a Finance perspective, when you buy a business, you are really buying a series of cash flows. Very recent jumps in cash flow require extra diligence!

How do you handle this strategically from a pre-LOI perspective? 1. You do your best to ascertain why the EBIDTA has improved and whether the changes are sustainable. 2. You model your assumptions (I can help with this) to identify key metrics and do some sensitivity analysis. 3. You make you best offer in the LOI, but state the assumptions that got you to that multiple. Then make clear that deviations from the assumptions found during DD will affect the multiple. 4. If the LOI is signed, dig in deep!
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