What does that seven-times deal actually tell you?

A competitor sold for seven times earnings. Your company has better margins, more equipment and customers who have stayed for years. Seven times sounds like a reasonable place to begin.

It may be. First, someone needs to reconstruct the other transaction.

A quoted multiple looks precise because it is a number. The information behind it can be surprisingly incomplete. The price may include future payments. The earnings may be forecast rather than historical. Real estate may be included in one transaction and excluded from another. A rumour repeated by several people does not become a fully described comparable sale.

For an owner thinking about retirement, the risk is practical. An incomplete comparison can become the number around which the family plans. Later, an offer that is economically reasonable may feel disappointing because everyone has been measuring it against a transaction they never understood.

Start with the numerator and denominator

A multiple divides one figure by another. Both need definitions.

Suppose an illustrative announcement describes a business as sold for up to CAD $14 million against $2 million of EBITDA, meaning earnings before interest, taxes, depreciation and amortization. The apparent multiple is seven.

Now suppose $3 million depends on the company meeting future performance targets. Fixed consideration is $11 million. That does not prove the company was worth 5.5 times EBITDA: the conditional payment may have value, and other adjustments may apply. It does establish that “seven times, all cash at closing” would be an inaccurate description.

Next, examine the earnings figure. Was it the latest completed year, the most recent twelve months or the next year’s forecast? Did it include adjustments for owner compensation, an unusual expense or projected savings? Were those adjustments accepted by the buyer, or merely proposed in the seller’s presentation?

The price definition matters too. Enterprise value describes the value of the operating business before the agreed treatment of cash and debt. Equity consideration concerns the ownership interest being acquired after the relevant adjustments. Comparing one transaction’s enterprise value with another’s equity consideration can make the arithmetic look tidy while measuring different things.

If those details cannot be established, record them as unknown, including in an early discussion. The transaction can remain a lead worth investigating. It should carry less weight in the valuation discussion than a comparable supported by reliable information.

Compare the economics a buyer receives

Two companies can serve the same industry and earn the same EBITDA while producing different cash returns.

One may need substantial equipment replacement soon. Another may operate with newer assets and modest reinvestment. One may collect quickly. Another may carry slow inventory and finance customers for months. EBITDA alone does not show those differences.

Likewise, customer loyalty needs an explanation. A relationship supported by several decision makers and repeat service requirements may differ from work awarded personally to the founder. The question is how the difference affects future earnings, cash requirements or the difficulty of transferring the business.

Scale can change the comparison. A larger company may have management depth, geographic reach or access to a different group of buyers. A smaller business may offer opportunities a particular acquirer values. Neither observation supports a universal premium or discount. It tells the advisor which differences need to be examined.

The buyer’s situation also matters. Your competitor may have filled a missing location in an acquirer’s network. A buyer with no similar need could view your company differently. That benefit should not be assumed to transfer simply because the businesses share an industry classification.

BDC’s valuation guidance recognizes that methods vary with the business and that a sale price can reflect transaction circumstances and buyer interests. A comparable transaction is evidence within that analysis; it is not a substitute for understanding what is being sold.

Ask the same questions of a low comparison

The discipline should work in both directions. If a buyer points to a low-priced transaction as proof that your expectations are excessive, ask about the consideration, earnings basis and business differences behind that example.

Was the seller under unusual pressure? Was a major contract ending? Was the buyer acquiring only part of the business? These are questions to investigate, not excuses to dismiss inconvenient evidence. A seller should be willing to change an expectation when better information supports doing so.

Avoid replacing one unsupported figure with a complicated spreadsheet full of arbitrary discounts. A percentage reduction for founder dependence and another for customer concentration can look analytical while hiding guesses. Explain the economic consequence first, then discuss how it should affect the valuation using appropriate professional judgment.

A good comparison can also guide preparation. It may reveal that buyers cared about management continuity or reliable reporting. That can suggest useful work, without promising that an improvement will reproduce another company’s multiple.

My own rule is simple. A multiple nobody can reconstruct does not go into a valuation discussion, on either side. If I cannot establish what was paid and what it was paid against, I will say so and set the transaction aside rather than let it anchor an owner’s expectations. Sellers are usually willing to apply that standard to the buyer’s low comparable. They should apply it to their own favourite one first.

The next time someone mentions a seven-times deal, keep the conversation going. Ask what was paid, what earnings were used and what the buyer actually acquired. The answers may support your expectations or change them. Either is more useful to retirement planning than a number that nobody can reconstruct.