A Reasonable Multiple Can Still Be the Wrong Price

A quality-of-earnings report can support the earnings figure. It cannot, by itself, establish that the acquisition is attractive.

A buyer can pay a market-standard multiple and still overpay.

Consider two businesses, each generating $2 million in trailing adjusted EBITDA and offered for $10 million. Both carry a five-times acquisition multiple.

The arithmetic is identical. The investment case may not be.

One business may retain customers because replacing it would be costly, disruptive, or operationally risky. The other may retain them because customers have not yet found an acceptable alternative.

Both can report healthy historical earnings. But their future cash generation may depend on very different assumptions.

A familiar multiple does not resolve that distinction. It expresses the purchase price relative to an earnings figure; it does not establish how long those earnings will last or what the buyer can reasonably expect to receive.

The Question Is Not Whether the Earnings Are Real

Financial due diligence is essential. A buyer needs to know whether reported earnings are accurate, recurring, and supported by the underlying business.

But verified historical earnings and durable future earnings are different propositions.

A quality-of-earnings analysis can help establish what the business earned. It does not necessarily establish whether customers will continue paying, competitors will remain at a disadvantage, or the buyer will need to make substantial new investments to preserve those earnings.

Those questions require commercial and strategic judgment.

The distinction matters especially in small and middle-market acquisitions, where purchase prices may depend heavily on assumptions about customer relationships, specialized expertise, proprietary processes, and competitive position.

What Actually Protects the Earnings?

An acquisition buyer should understand why customers buy from the company rather than its competitors—and why that behavior is likely to continue.

Consider a specialized software business.

Its customers may have used its products for years. Renewal rates may be high, customer relationships stable, and margins attractive.

Those facts are encouraging, but they do not necessarily establish a durable competitive advantage.

Customers might remain because the software is deeply embedded in their operations, switching would be expensive, and alternatives are difficult to implement.

Alternatively, customers might remain simply because comparable solutions have not yet been readily available.

The historical financial statements may look nearly identical in both cases.

But the second business may face substantially greater risk if technological developments, artificial intelligence, or new competitors make its product easier to reproduce or replace.

The important question is not whether a particular technology will destroy the business. It is whether the assumptions supporting future cash generation remain defensible.

The Multiple Cannot Substitute for Judgment

Acquisition multiples are useful reference points. They allow buyers to compare transactions, identify market expectations, and test whether a proposed price falls within a plausible range.

But a multiple is not an independent measure of value.

Two companies can report identical EBITDA and warrant very different acquisition prices.

The difference is not what they earned last year, but what the buyer can reasonably expect them to generate after closing.

Competitive durability matters because it supports future cash generation. It does not eliminate the need to evaluate growth, reinvestment requirements, cash conversion, financing, and price.

Nor is every competitive vulnerability disqualifying. A business facing greater uncertainty may still be an attractive acquisition at the right price, with the right protections, or under an ownership strategy capable of improving its position.

The critical issue is whether the acquisition economics properly recognize those risks.

The Risk of Asking the Right Questions Too Late

One of the more consequential mistakes in acquisition decisions is allowing the initial valuation framework to become an anchor.

Once the buyer accepts an earnings figure and a seemingly reasonable multiple, the discussion can shift toward confirming the transaction rather than testing the assumptions that justify it.

Financial, legal, and operational advisers may each perform their assignments competently. Yet the overall acquisition can remain unattractive.

The problem is not necessarily a failure of technical diligence.

It may be a failure to integrate the findings into a coherent investment judgment.

A buyer needs someone willing to ask whether the business deserves the proposed price, even when the transaction is otherwise proceeding smoothly.

That judgment must account for what can go wrong, what must go right, and which assumptions the buyer is effectively paying to believe.

A Better Acquisition Decision

Before committing capital, the buyer should be able to explain not only how the purchase price was calculated, but why the business is likely to generate the expected returns.

That explanation should address the sources of customer loyalty, the strength of the competitive position, the durability of margins, the reinvestment needed to preserve the business, and the circumstances under which the investment thesis could fail.

The purpose is not to eliminate uncertainty. No acquisition analysis can do that.

The purpose is to distinguish risks that can be understood, priced, and managed from assumptions that remain unsupported.

A reasonable multiple can still be the wrong price when the earnings supporting it are less durable than the acquisition model assumes.

The value of experienced judgment lies in recognizing that distinction before the buyer becomes committed to the transaction.

William Cavalier & Co.

Experienced Judgment. Better Decisions.

William Cavalier & Co. provides independent strategic judgment to business owners, investors, and leadership teams confronting acquisitions, capital allocation, and consequential business decisions.