Our industry is experiencing a temporary cyclical downturn, and the buyer wants to buy us at a trough multiple. How do we use the Income Approach to structure a bridge that captures our recovery value?

Question

Tyler Smith · Accepted Answer

Selling during a temporary, cyclical industry downturn can cost you millions if you accept a valuation based on trough multiples. If your business has strong fundamentals, do not let a buyer treat a temporary market dip as a permanent decline. You must restructure the conversation around future cash flows and structured recovery value. First, pivot the valuation methodology from a backward-looking market multiple to the Income Approach. Use a discounted cash flow model to show the business's capacity to generate cash as the market recovers. Back up these projections with your detailed EOS V/TO® and historical data proving your ability to rebound quickly from past cycles. Second, structure the deal to bridge the valuation gap. Negotiate a contingent pricing mechanism where the purchase price increases as market volumes return to historical averages. For example, structure a baseline payment at close with an escalator clause that pays out additional multiples of EBITDA as specific industry recovery benchmarks are met. By using a structured earnout or an equity roll-over where you retain an ownership stake in the combined entity, you capture the upside of the recovery. This allows you to exit now without leaving your future growth value on the table.