Part VII
Underwrite
Find the real earnings, then price them. Reading the statements as a buyer, add-back tiers, the do-it-yourself quality of earnings, the three valuation lenses, the plain-English LBO, the walk-away price, and a full worked deal.
Read the Financials
- L7.1.1
The Three Statements for Buyers
What matters in each statement, book-to-tax mismatches, and reconciliations first: if the P&L will not reconcile to the tax return and the bank statements, stop paying for anything else. Dropping financials into a model is not diligence.
TraditionalSelf-FundedSponsorOpen
Find the Real Earnings
- L7.2.1
Add-Back Tiers A, B and C
The canonical normalization frame with the owner-replacement adjustment, and the multiplier warning: at a four-times multiple, every dollar of add-back you accept adds four dollars to the price.
TraditionalSelf-FundedSponsorCore - L7.2.2
Validate Against the Source Documents
Trace claimed earnings to the contracts, invoices and schedules that produce them, not to the deck. The seller's own source documents are the most reliable check on the broker's headline.
TraditionalSelf-FundedSponsorAdvanced - L7.2.3
The Overlay Method
Overlay-adjusted EBITDA: challenge replacement-compensation add-backs, strip pass-through revenue to find organic growth, verify claimed win rates against external data, and watch for pre-close working-capital drain.
TraditionalSelf-FundedSponsorAdvanced
The DIY QoE
- L7.3.1
Six Findings You Can Catch Yourself
Hockey-stick revenue, a pre-sale margin spike, un-normalized owner compensation, aggressive add-backs, working-capital drain and related-party transactions. All six surface from documents you already have.
TraditionalSelf-FundedSponsorCore - L7.3.2
When to Buy the Real Thing
What a quality of earnings report contains, why most dead deals die on the financials rather than the legal work, and the overpay math that makes the fee look small. Under the current SBA rules a QoE is mandatory above a purchase-price threshold, so the argument is now underwriting law.
Self-FundedAdvanced
Valuation
- L7.4.1
Comps, DCF, DSCR
The three lenses and what each can and cannot tell you. Debt service coverage is the gating math for an SBA deal: the 1.25x floor is computed on historical earnings only, with no credit for projections.
Self-FundedAdvanced - L7.4.2
The Effective Multiple
Diligence overlays move the real multiple by a turn or two. A worked case in which a remediation bill turns a reasonable headline multiple into an expensive one. Price the overlay, not the ask.
TraditionalSelf-FundedSponsorAdvanced
The LBO and the Walk-Away Price
- L7.5.1
The Plain-English LBO
The model in words before spreadsheets: debt, seller note and equity; return targets and coverage floors; bull, base and bear cases; sensitivity grids. Your job is judgment, not Excel.
TraditionalSelf-FundedSponsorAdvanced - L7.5.2
The Walk-Away Price
The number that ends the negotiation, set before the negotiation starts and written down where you cannot quietly revise it. The fourth gate of the Walk-Away Doctrine.
TraditionalSelf-FundedSponsorAdvanced
The Worked Deal: Coastal Comfort HVAC
- L7.6.1
The Full Exercise
A fictional sample deal with planted flags: the broker's adjusted EBITDA claim, the recurring figure you should arrive at, and the fair value range against the ask. Graded against an instructor answer key, and used as the running case through sourcing, screening, the letter of intent and the close.
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Buy Growth or Buy Cash Flow
- L7.7.1
Two Different Purchases
The growth-acquisition and leveraged-buyout frameworks side by side: when thin recurring revenue, key-person risk or a regulatory cliff forces an equity-heavy structure, how to size a niche market, and how to read an unrepresented founder's anchor.
TraditionalSelf-FundedSponsorAdvanced