The Valuation Conversation: How an Attorney Sets the Range With a Client

Start with adjusted EBITDA, line by line

The valuation conversation begins with the financial statements collected in discovery and the adjustments that turn reported earnings into what a buyer will underwrite. Adjusted EBITDA is a non-GAAP measure, so the attorney should define the adjustments clearly and keep the comparable reported measure visible. [1] The attorney should walk the client through each adjustment and the reason for it, because every one of them may be challenged in diligence.

Common add-backs are owner compensation above a market replacement salary, personal expenses run through the business, one-time legal or consulting costs, and rent paid to a related party above or below market. Common deductions are the market salary for a role the owner performs that a buyer will have to hire for, deferred maintenance that has been pushed off, and revenue from a customer that has already given notice. A client with $4 million of reported EBITDA and $600,000 of defensible add-backs has a $4.6 million illustrative adjusted EBITDA number. A client who wants to add back $1.5 million of expenses that a buyer would consider ordinary has a problem the attorney should surface now rather than in the IOI round.

The discipline here is traceability. Each adjustment should point to a specific line in the general ledger and a specific document in the data room. A buyer's quality-of-earnings review will typically test the nature, support, and consistency of these adjustments, so the attorney who has already documented them has less to retract later.

The multiple range and where it comes from

With adjusted EBITDA in hand, the attorney applies a range of multiples. Enterprise-value multiples relate the value of the entire enterprise to a measure such as EBITDA, and their interpretation depends on fundamentals such as expected growth, profitability, and the cost of capital. [2] The range should reflect relevant businesses and the client's size band, adjusted for the specifics of this company. The attorney is not expected to be a valuation expert; the attorney is expected to explain to the client why the range is where it is and what moves a business within it.

The factors that can move a multiple are familiar from diligence. Recurring or contracted revenue may be viewed more favorably than project revenue. A diversified customer base may be viewed more favorably than one with concentration. A management team that runs the business without the owner may support a different view from a business that stops when the owner is on vacation. Growth and a documented pipeline can matter, while audited or reviewed financials may reduce uncertainty compared with less extensively reviewed records. These are judgment factors, not automatic price premiums.

Present the range as a low, a mid, and a high, and attach the reasoning to each. "The low case assumes a buyer treats the top customer as at risk and discounts for the owner's role in sales. The high case assumes a strategic buyer who already serves that customer and does not need the owner's relationships." A client who hears the reasoning understands that the range is a map of possible buyer behavior, not an opinion of worth.

Reconciling the client's number with the market's

Most owners arrive with a number in mind. It came from a peer who sold, a broker's cold call, or a rule of thumb from a trade association. The attorney's job in this conversation is to reconcile that number with the range, and to do so in a way that preserves the relationship.

The useful approach is to ask the client where the number came from and then test it against the same factors. If a peer sold for eight times, what was the peer's revenue mix, size, and growth? If the owner's number is above the high case, the attorney should say so and explain which factors would have to be different for a buyer to pay it. Sometimes the conversation reveals a fact the attorney did not have, such as a contract renewal that just closed. More often it reveals that the owner's number is a hope, and the attorney who names that early protects the client from launching a process that ends in disappointment.

The floor matters as much as the target. Agree in writing on the number below which the client would rather keep the business. This is the number the attorney will use when deciding whether an IOI is worth a second-round invitation, and it is far easier to set before any offer is on the table.

Structure is part of the number

A valuation range stated as a single enterprise value hides half of what a client needs to know. The conversation should cover how the headline number may be paid: cash at close, seller note, earnout, rollover equity, and escrow or holdback. Two IOIs at the same headline can differ materially in cash at close and in the timing and certainty of payment.

The attorney should explain each structure in plain terms and ask the client which ones are acceptable. An owner who needs the proceeds to fund retirement may reject any earnout. An owner who believes in the business's next three years may prefer rollover to a higher cash price. These preferences feed directly into the buyer list and into how the CIM presents the opportunity, so they belong in the valuation conversation, not only in the LOI negotiation.

Net proceeds complete the picture. Work with the client's CPA to estimate taxes under an asset sale and a stock sale, and show the client what the mid case produces after tax and after debt repayment. For illustration, a client who sees a $30 million enterprise value become $19 million in the bank has a clearer basis for setting a floor. The actual calculation depends on the transaction, debt, taxes, and other closing adjustments.

Documenting the range before launch

The output of the valuation conversation is a short memo to the client that records adjusted EBITDA with each adjustment listed, the multiple range with the reasoning for the low, mid, and high cases, the structures the client will and will not accept, the estimated net proceeds at the mid case, and the agreed floor. The memo is the reference point for every later decision, and it is the document the attorney returns to when the client asks, three months in, whether an offer is good.

One thing to do this week: for an owner client whose financials you already hold, list the five adjustments you would expect a buyer to make or challenge, and estimate what each does to EBITDA. That list is the first half of a valuation conversation, and it is a natural reason to call the client.

How Acquivo Pro fits

Acquivo Pro's valuation engine runs on the questionnaire and the documents collected in discovery, across 21 industry verticals. The engine is deterministic: the same inputs always produce the same output, and every figure traces to its source, so the attorney can show the client exactly which document and which adjustment produced each number. The attorney sets the range, explains the reasoning, and agrees on the floor with the client; the platform prepares and organizes the figures that make that conversation precise. To walk through a process on a client you have in mind, request a demo through the Contact page.