LenderHawk analysis. Not affiliated with or endorsed by The Permanent Podcast.
Brent and Emily compare fixed-price deals with formula-based pricing tied to trailing earnings, focusing on where each structure creates certainty or risk. The discussion centers on how timing, earnings adjustments, and working-capital mechanics can move a deal materially between LOI and close. They prefer clarity up front and argue that parties should leave some room for ordinary variance instead of fighting over every dollar at closing.
Buy-side operators, searchers, and sellers who need to understand how formula pricing and fixed-price structures behave between LOI and close.
A fixed enterprise value gives both sides more certainty, especially when diligence is expected to be short.
Formula-based pricing pushes more risk into the period between LOI and close because the final number depends on later earnings calculations.
If buyer and seller do not define adjustments the same way, the final price can diverge by millions even when both sides think they agreed on the same valuation basis.
Working-capital targets and earnings formulas can be set on different time windows, so the closing price and closing balance sheet requirement may move separately.
The longer a deal takes to close, the more room there is for either earnings slippage or seller renegotiation.
A practical bargaining posture is to preserve the agreed range unless the business changes dramatically, rather than trying to re-open every dollar at the finish line.
Some buyers value a company at 4x trailing-12-month EBIT.
Used as an example of a formula-based valuation method.
Another buyer may propose a fixed $8 million transaction value that is expected to hold through diligence.
Used as an example of a numerical valuation method.
A formula-based valuation may be calculated only three weeks before closing.
Illustrating timing risk when the final price is determined late in the process.
Investors using formulaic pricing may look at 12 to 36 months of performance when setting value.
Brent describes how some buyers smooth earnings over longer periods.
Enterprise value can be based on a 36-month EBIT blend while working-capital requirements are still based on trailing 12 months.
Example of using different measurement windows for different deal terms.
Prefer a fixed number when diligence can be completed quickly.
Why: A fixed price reduces uncertainty and makes it easier for both sides to plan toward closing.
Define earnings adjustments and owner-addback conventions before the final calculation date.
Why: If the parties are not using the same accounting language, the closing price can change dramatically at the end.
Build a grace range instead of insisting on every dollar at close.
Why: Normal business fluctuation is likely between LOI and closing, so a tolerance band reduces avoidable renegotiation.
Focus on the future once the agreed range is set.
Why: Re-litigating small changes at the finish line can derail momentum and damage trust.
The hosts describe a case where a seller plugged in a formula assuming certain personal expenses would be added back, only to learn near closing that the buyer would not accept most of those adjustments. The resulting valuation gap was large enough to change the economics by millions.
Lesson: Late agreement on accounting adjustments can destroy the apparent value of a formula-based offer.