A founder reads an indicative offer letter for the third time at the end of a long day. Five times EBITDA. Three million in EBITDA, fifteen million on the cover page. The number looked clean when the broker first shared it. It looks less clean now that the deal structure has arrived underneath it. Roughly six million paid at closing. The rest split across an earnout, an escrow, and a seller note over the next two years.
He works back through the page and cannot find where the other nine million went. He has not yet done the diligence. This is just the indicative offer.
Why does the cash at closing look so different from the headline number?
The headline multiple is not the cash number. On a founder-dependent business, the buyer applies two adjustments in sequence: a discount to the multiple itself, and a different deal structure that defers most of what remains. On a £3m EBITDA firm, the gap between the headline figure and the cash that arrives at closing can run to £8m to £10m. The difference is not noise.
Both adjustments come from the same source. The buyer is pricing the risk that the business will not look the same once the founder is no longer in the room. They cannot eliminate that risk by paying for it once at closing. So they do two things. They lower the multiple they are willing to pay against EBITDA. And they hold back a meaningful share of the consideration until the risk has been observed and survived.
This pattern is consistent enough across lower middle market services transactions to be treated as the structural norm. The founder sitting in the conference room with the indicative offer is meeting standard buyer behaviour, the same behaviour they would meet from any reasonable buyer in any reasonable deal of comparable shape.
Most founders meet both adjustments at the same moment. They were quietly hoping the headline multiple was the negotiation, and that cash at closing was a minor detail. The diligence room is where they discover the order is reversed. Cash at closing is the real negotiation, and the multiple is a backwards-engineered number on top of it.
What does the multiple actually move on a £3m EBITDA business?
Independent businesses in the lower middle market sell at 7 to 8 times EBITDA. Founder-dependent businesses of the same size and sector struggle to clear 3 to 4 times. Apply that range to £3m EBITDA and the gap is between £9m and £15m of enterprise value before any deal structure is layered on. That is the multiple compression alone, and it is the loudest single number in the conversation.
The multiple compression is not industry specific or buyer specific. It tracks the buyer’s read of how much of the EBITDA would survive a transition. Where 60 percent of revenue is delivered through founder relationships, the buyer’s read is that a meaningful share of EBITDA is at risk. They do not strike that revenue out of the model, that would be too crude. They reduce the multiple they are willing to pay across the whole base.
A worked example clarifies the shape. £3m EBITDA at 7 times equals £21m enterprise value. The same £3m EBITDA at 4 times equals £12m. Between the two is a £9m gap created by founder dependency, sitting underneath any other adjustment the buyer might make. On the high end of the range, the gap reaches £15m.
This is the cleanest of the three adjustments to read. The founder can see it in the indicative offer letter. The number is on the page. Whether it sits closer to 4x or 7x is set, in operational terms, by what the buyer’s diligence team finds when they walk through the firm. Negotiation in the room cannot move it far.
Where does the rest of the cash go?
On a founder-independent business of comparable size, around 80 percent of the price is paid at closing. On a founder-dependent one, it is closer to 40 percent. The remaining 60 percent is distributed across earnout, escrow, and seller note structures held over 12 to 36 months. Each piece is doing distinct work for the buyer.
The earnout is the largest of the three. Buyers of dependent businesses make a meaningful share of the price contingent on customer retention, revenue stability, and the founder’s transition through the post-closing period. A 12 month earnout tied to revenue, plus a 24 month earnout tied to retention, is a standard structure in the lower middle market. The founder sees that money only if the business behaves the way the buyer was promised it would.
The escrow is the second piece. Standard escrow on these deals is 10 to 20 percent of the total purchase price held in trust for 12 to 24 months. Founder-dependent businesses see that band shifted upward, often 15 to 20 percent, often for the full 24 months. The escrow is the pool the buyer reaches into if material issues emerge after closing.
The third piece is the founder’s own employment lock-in. Buyers of founder-dependent businesses negotiate 18 to 36 month transition agreements. The founder is paid for those years, but tied to them, often with the rest of the consideration contingent on staying. The exit they thought they were buying is partially deferred and partially conditional on still being there.
What changes if the work has been done in advance?
Three years out, the structural work starts to recover both the multiple and the cash-at-closing ratio. Five years out, it can erase the gap. The window is not generous, but it is movable. The founder’s own week is the leading indicator, and the firm that is run differently is the firm the buyer’s spreadsheet treats differently.
None of these adjustments are aesthetic. They follow operational facts the buyer can audit. Customer relationships sitting on the firm’s side of the line, not the founder’s. A team able to make material decisions without escalating. Documented systems that a new operator could pick up without losing the institutional memory.
The same disciplines that close the multiple compression close the cash-at-closing ratio. Buyers concede earnout terms when the dependency they were pricing for has visibly been removed. The escrow band moves to the lower end of the standard range. The founder employment lock-in negotiates down from 36 months to 12, sometimes to a clean handover.
The honest version of this conversation is exit honest. There is no implied criticism of how the firm has been built, only a description of what the buyer’s spreadsheet does to the headline number when dependency is present. The good news is that the work is operational, the timeline is observable, and the firm built for the buyer’s spreadsheet is also the firm that gets the founder’s life back.
Closing
The peer with the indicative offer eventually accepted a renegotiated structure with more cash at closing and a shorter earnout. He took a smaller headline number to do it. The firm he was selling was different from the firm in his head. The diligence had named that. He had not had the timeline to act on it.
If you would like to walk through what your own line by line might look like, the conversation is short and specific. Book a conversation.
