Bridging a $30 Million Valuation Gap Without Splitting the Difference 

Sometimes the biggest obstacle to getting a deal done is not a disagreement over what a business is worth. It is a disagreement over what the future holds—and who should bear the risk if things do not play out as expected. 

In one middle-market transaction, a buyer and seller found themselves $30 million apart on a $100 million business. Rather than splitting the difference or walking away, one prospective buyer found a creative way to bridge the gap. 

The Situation 

A middle-market products company generating approximately $10 million in EBITDA was up for sale. The business was attractive, but an unexpected macroeconomic development created a significant wrinkle in the sale process. 

Suppliers throughout the industry had begun imposing substantial surcharges on their customers. These surcharges were widespread, impacting virtually every participant in the industry’s supply chain. Because the development was relatively recent, the resulting costs had not been reflected in the historical financial information presented in the CIM or the sell-side QofE report. 

The impact was anything but trivial. On a run-rate basis, the surcharges threatened to reduce the company’s TTM EBITDA from approximately $10 million to just $6 million – $7 million, a 30% – 40% earnings reduction. 

The investment banker and management team maintained that these surcharges were temporary and should therefore be treated as one-time, non-recurring adjustments to EBITDA. There was some merit to their argument—the industry had little historical precedent for surcharges of this nature, and most observers expected the disruption to eventually subside. 

The problem? Nobody knew when. 

Management assured prospective buyers that the surcharges would disappear in the relatively near term, but there was little tangible evidence to support that assertion. Buyers conducted their own third-party channel checks, which largely confirmed the uncertainty. 

With no clear visibility into when earnings might normalize, many buyers withdrew from the process. Others indicated a willingness to proceed, but only at a valuation based on the reduced $6 million – $7 million earnings level. The banker made clear that bids at those levels would not be competitive. 

The Breakpoint 

One prospective buyer was particularly reluctant to walk away. The investor had been searching for a platform investment in the sector for years, and this was the first opportunity that checked nearly all the boxes. The business was attractive, the long-term investment thesis remained intact, and the buyer generally agreed with management’s assessment that the surcharges would eventually abate. 

But agreeing that a problem is temporary is very different from knowing how much it will cost in the meantime. 

Before the surcharges emerged, the investor had valued the business at approximately 10x its $10 million of TTM EBITDA, or $100 million. Applying that same multiple to the revised $7 million earnings level suggested a value closer to $70 million. That left a $30 million gap. 

The seller was motivated but understandably unwilling to accept a valuation that assumed the company’s recently depressed earnings were its new permanent reality. Meanwhile, the buyer was unwilling to pay upfront for earnings that might not return for an indeterminate period. Both sides had reasonable positions. Neither could substantiate its assumptions about the timing of a recovery. 

The central question became: How could they structure a transaction that recognized the company’s potential $100 million value without requiring the buyer to assume all the risk associated with the surcharges? 

The Decision 

Rather than continue debating whether the surcharges qualified as an EBITDA addback, the investor approached the problem from a different angle. 

They stepped back and considered how they had handled analogous issues in other transactions. For example, when a business has significant deferred capital expenditures, buyers will often negotiate a dollar-for-dollar purchase price reduction to account for the cash required to address those expenditures. In such cases, they do not apply an EBITDA multiple to the expenditure because it represents a finite cash outflow catch-up payment rather than a permanent impairment to the company’s earnings power. Could a similar approach work here? 

If the surcharges truly were temporary, perhaps the economic issue was not a permanent $3 million reduction in EBITDA worth $30 million at a 10x multiple. Perhaps it was instead a finite, albeit uncertain, amount of cash the business would have to absorb before returning to normalized operations. That distinction became the foundation for a creative proposal. 

The investor offered to maintain the original $100 million headline valuation but with a different payment structure: 

• $70 million funded at closing, reflecting a 10x multiple of the reduced $7 million EBITDA level. 

• Up to $30 million in additional contingent consideration, tied to how quickly the surcharges abated. 

• If the surcharges disappeared within the first quarter following closing, the seller would receive the full additional $30 million. The buyer would effectively absorb the short-term cash costs incurred during that period. 

• If the surcharges continued beyond the first quarter but disappeared before the first anniversary, the additional consideration would be reduced dollar-for-dollar by the cash cost of the surcharges incurred by the business following closing. 

• If the surcharges remained in place at the one-year anniversary, the remaining $30 million would not be paid. At that point, it would be a more persistent part of the expense structure and a drag on the earnings generating capacity of the business. 

The structure accomplished something important. The seller retained an opportunity to receive the full original valuation if its expectations about the temporary nature of the surcharges proved correct. Even if normalization took longer than expected, the seller could still receive substantial additional consideration with the reduction based on the actual cash costs incurred rather than a multiple of those costs. 

The buyer, meanwhile, protected its downside by funding only $70 million upfront. It would pay more if—and to the extent that—the circumstances supporting the original valuation materialized within the agreed period. 

Importantly, the buyer was also willing to absorb some of the uncertainty. By allowing the seller to receive the entire $30 million if the surcharges disappeared within the first quarter, the buyer effectively agreed to shoulder the near-term cash burden rather than immediately passing every dollar of that cost back to the seller. While this would effectively be an incremental increase to the price paid, it was a bounded risk and viewed as a small probabilistic price to pay to bridge the difference of opinions on the surcharge issue. 

From the seller’s perspective, the structure was far from ideal compared with the original clean offer. But the circumstances had changed, and the seller recognized that the earnings uncertainty was real. Ultimately, the seller agreed. 

There was one additional wrinkle. The buyer negotiated an optional delayed-draw debt facility with its lender, allowing it to access incremental financing as the contingent consideration became payable. This avoided having to over-equitize the transaction to fund a potential future payment or arrange an entirely new financing shortly after the acquisition. 

The Crux 

What made this transaction work was not simply the use of contingent consideration. Earnouts and deferred purchase prices are hardly novel concepts in M&A. 

The ingenuity was in recognizing that the nature of the problem called for a different way of valuing and allocating the risk. The buyer distinguished between two very different possibilities: a permanent impairment to the company’s earnings power and a temporary cash flow burden associated with an unusual, industry-wide disruption. The former could justify a significant reduction in enterprise value based on an EBITDA multiple. The latter might be more appropriately addressed through a dollar-for-dollar economic adjustment, provided the disruption actually proved temporary. 

The structure also recognized that the uncertainty itself had value—and that neither party should necessarily have to bear all of it. By tying additional consideration to what actually happened after closing, the parties avoided having to settle an inherently uncertain forecast through a single, all-or-nothing valuation assumption. 

The result was a transaction that preserved the seller’s upside, protected the buyer’s downside, and gave both parties a credible path forward. 

The broader lesson (the crux): When a valuation disagreement is driven by uncertainty rather than fundamentally different views of the underlying business, the solution may not be finding the right number. It may be finding the right structure.