Our EBITDA is currently three million dollars, placing us in a lower valuation tier, but we are projected to hit five million next year. How do we use a structured recapitalization or a tiered valuation pricing formula in our LOI to capture the higher multiple of the five million dollar tier if we hit our numbers during the transaction process?

Question

Tyler Smith · Accepted Answer

Buyers frequently exploit the timing of a transaction to buy a growing company at a lower historical multiple right before it steps into a higher valuation tier. To capture the true value of your growth, you must build a tiered valuation formula directly into your Letter of Intent. Instead of agreeing to a fixed purchase price based on last year's performance, propose a dual-track pricing mechanism. This formula links your final enterprise value to your trailing twelve-month EBITDA at the exact date of closing, with an escalating multiple as you hit specific milestones. For example, negotiate a structure where your multiple is five times EBITDA if your closing EBITDA is under four million dollars, but escalates to six times if you close at over four and a half million dollars, and seven times if you hit five million. This structure aligns the interests of both parties and rewards you for maintaining operational momentum. To execute this strategy successfully, your leadership team must maintain absolute focus on their Rocks. Use your weekly Level 10 Meeting to monitor the leading indicators that drive your closing EBITDA. By keeping your operational execution tight, you ensure that you do not drop the ball during diligence and miss the higher valuation tier.