Key terms before you start
The earnings level your analysis supports after normalizing the P&L against documented add-backs and pressure-testing against cash reality. This is what you buy. It differs from owner-reported EBITDA, which is what the seller claims.
The process of adjusting reported profit for items that will not continue under new ownership: owner pay above market rates, one-time documented expenses, and personal expenses running through the business. Only adjustments you can support with documentation belong in normalized EBITDA.
Three versions of implied EBITDA that reflect different assumptions about add-backs and risk. The conservative case counts only clean documented adjustments. The base case counts most add-backs but discounts anything not fully clean. The optimistic case assumes all add-backs are real. If the deal only works in the optimistic case, you have hope, not underwriting.
The transaction value divided by EBITDA. In the lower middle market, service businesses typically trade at 3x to 6x, depending on earnings quality, owner dependency, customer concentration, and growth. The multiple you use should reflect the specific risk profile of this deal.
The four-step model.
A 4-step process for the four-step model.
- Step 1: Normalize the P&L Start with the owner's reported EBITDA. Adjust only for items you can explain and support with documentation. Common legitimate adjustments include owner pay above market replacement cost (add back the excess, use a realistic replacement sa (Step 1)
- Step 2: Build three cases Conservative case: count only clean, fully documented add-backs and haircut anything weakly supported. Base case: count most add-backs but discount anything not fully clean. Optimistic case: assume all add-backs are real and sustainable. Bu (Step 2)
- Step 3: Run the margin reasonableness test Convert each EBITDA case into an EBITDA margin and compare it to industry norms for similar businesses. If your implied margin is far above what is typical, one of three things is usually true: the business has a structural advantage you ca (Step 3)
- Step 4: Stress test customer concentration If the top customer represents more than 30% of revenue, run a downside case. Remove or haircut that customer's revenue and assume short-term disruption while you replace the work. Then see what happens to EBITDA and your return profile. If (Step 4)
- Normalize the P&L transforms Build three cases: Step 1 naturally follows from the prior action.
- Build three cases transforms Run the margin reasonableness test: Step 2 naturally follows from the prior action.
- Run the margin reasonableness test transforms Stress test customer concentration: Step 3 naturally follows from the prior action.
Why implied EBITDA matters more than the owner's number.
Connectivity map for why implied ebitda matters more than the owner's number
- 1.4 Concept: Why implied EBITDA matters more than the owner's number The core concept in quick underwriting model
- The Owner'S Number Includes Assu: The owner's number includes assumptions, yours should not Owner-reported EBITDA almost always includes add-backs. Some are legitimate. Some are not. Some are partially legitimate but overstated. The only way to know is to verify each one against the ledger. If you anchor your LOI to the owner's nu
- Implied Ebitda Is What You Can D: Implied EBITDA is what you can defend When you present your LOI, the owner will ask why your price is what it is. When your lender or partners review the deal, they will ask the same question. Implied EBITDA gives you a specific, verifiable answer: here is what the business ear
- Why implied EBITDA matters more than the owner's number feeds The owner's number includes assumptions, yours should not: The owner's number includes assumptions, yours should not supports why implied ebitda matters more than the owner's number.
- Why implied EBITDA matters more than the owner's number feeds Implied EBITDA is what you can defend: Implied EBITDA is what you can defend supports why implied ebitda matters more than the owner's number.
A worked example: what the one-page output looks like
The business is a home services company. Owner reports representative EBITDA. After your Tier 1 and Tier 2 review, you find the following adjustments.
Owner-reported EBITDA: a representative amount Add-backs claimed: Owner pay above market (+a documented amount), personal vehicle (+documented amount 50% documented → credit a representative amount), one-time legal settlement (+a documented amount). Missing expenses identified: Market-rate replacement GM (-defined amount), health insurance not in books (-defined amount), deferred HVAC maintenance (-defined amount). Conservative case: Owner pay (defined amount) + 50% personal vehicle (defined amount) + legal settlement (defined amount) - all missing expenses (defined amount) = the conservative implied EBITDA view. Base case: one structure add-backs × 75% + legal (defined amount) - missing (defined amount) = a defined case Optimistic case: Full a representative amount add-backs - a representative amount missing = a defined case At 4x: Conservative = a defined case / Base = a defined case / Optimistic = a defined case The deal only works at optimistic case value framing if you believe every add-back is real and none of the missing expenses apply. Anchor the LOI to the base case at the agreed amount Margin check: a representative amount / representative revenue (from bank statements) = 25.6% EBITDA margin. Home services businesses typically run 12 to 22%. You are above market. Either the business has a genuine value framing advantage worth documenting, or expenses are understated. Flag for the margin reasonableness conversation with the seller.
Value off what you can defend, not what you hope is true
The quick underwriting model is not about being right. It is about knowing what you believe, why you believe it, and what would change your mind. That clarity is what lets you write an LOI with confidence and negotiate without getting backed into a corner.
This course is operational guidance, not investment, legal, tax, or financial advice. SilverShore Partners is not a registered broker-dealer or investment adviser; in qualifying private-company transactions we may operate within the federal M&A broker exemption under Section 15(b)(13) of the Securities Exchange Act. Confirm specifics with your own advisors.