LenderHawk analysis. Not affiliated with or endorsed by The Permanent Podcast.
Brent and Emily unpack why EBITDA is only a proxy for cash flow and why the real issue in a sale is defining the base number behind every valuation multiple. They emphasize that buyers will normalize add-backs, test capital intensity, and focus on what earnings actually remain for owners after reinvestment. The episode is a practical reminder that mismatched assumptions around EBITDA, adjusted EBITDA, and valuation multiples can create major deal friction.
Business owners, buyers, and ETA investors who need a sharper way to think about valuation multiples, earnings adjustments, and how to avoid misaligned expectations in a sale process.
EBITDA is only a starting proxy because buyers care about the cash that remains after reinvestment, not the accounting number by itself.
A multiple such as 4x or 6x means little until both sides agree on the exact earnings base being multiplied.
Adjusted EBITDA can be overstated when add-backs include recurring marketing costs, bonuses, or other expenses that buyers will treat as real operating costs.
A company that shows $6 million of adjusted EBITDA can produce far less owner cash flow once add-backs and annual capex are tested.
Low-capital-intensity businesses with few adjustments are the situations where EBITDA is closest to true cash flow.
The difference between $4 million and $5 million of annual earnings is enormous when valued at a 5x multiple, so precision matters early.
Clear definition of the X in any valuation expression prevents avoidable negotiation friction and wasted time.
A 5x multiple turns a $1 million difference in annual earnings into a $5 million valuation difference.
Brent uses the example to show why small differences in the earnings base matter so much.
A company pitched as having $6 million of adjusted EBITDA may have $2 million of add-backs and another $2 million of annual capex, leaving closer to $2 million for the owner.
The hosts illustrate how the headline EBITDA number can overstate distributable cash.
Ask early, 'four to six times what?' whenever someone cites a valuation multiple.
Why: The same multiple can mean very different prices depending on whether it is applied to EBITDA, adjusted EBITDA, EBIT, cash flow, or revenue.
Force a precise definition of the base earnings number before advancing a sale process.
Why: If buyer and seller start from different definitions, they will discover the mismatch too late and waste time.
Stress-test every add-back as if you were the buyer.
Why: Expenses that are presented as discretionary may still be treated as real operating costs in diligence.
Separate accounting earnings from owner cash by testing recurring capex and reinvestment needs.
Why: A business can report strong EBITDA while still requiring substantial ongoing investment that reduces distributable cash.
The hosts describe a pitch where the company claimed $6 million of adjusted EBITDA, but the number included $2 million of add-backs and another $2 million of annual capex. That combination made the true owner-level cash closer to $2 million.
Lesson: Headline EBITDA can materially overstate what an owner can actually take home.