EBITDA is usually the first number on the table in any deal conversation. It is quick to calculate, easy to compare across businesses, and it sits at the centre of most valuation discussions. Apply a multiple to it and you have a headline price.
But EBITDA rarely tells the whole story.
In our experience at Hillpine, across more than 100 transactions in India, the UK, Europe, the US, Australia and the Middle East, the issues that move price or derail a deal are seldom hidden in the EBITDA line itself. They sit around it. Earnings that will not repeat. Profits that never turn into cash. A customer base that rests on two relationships. Obligations that behave like debt but are not reported as debt. A business that runs on the founder’s personal involvement.
These are the areas we push hardest on when we act for buyers.
1. Quality of Earnings
Reported EBITDA is a starting point. What a buyer is really paying for is the level of earnings the business can sustain under new ownership.
That means testing what sits inside the number. Are there one-off revenues, such as a large project that will not recur or a pricing windfall? Have costs been held back ahead of the sale, such as deferred maintenance or unfilled vacancies? Is the founder drawing a salary well below market, or running personal expenses through the business? Are contractors filling roles that a new owner would need to employ directly? Are there transactions with related parties on terms an independent party would not accept?
A Quality of Earnings review works through each of these items and arrives at an adjusted EBITDA that reflects the true run-rate. Adjustments can go both ways. In founder-led businesses, we often find that normalising owner remuneration and related-party rent reduces EBITDA rather than increasing it.
Every adjustment the seller proposes should be backed by evidence. If it cannot be supported with invoices, contracts or ledger detail, it should not find its way into the valuation.
2. Cash Flow and Cash Conversion
Profit does not always mean cash in the bank.
A company can report healthy EBITDA and still struggle to fund its operations. Customers may be paying later, inventory may be building up, or revenue may be recognised well before it is billed or collected.
We look at cash conversion, which is operating cash flow before tax as a percentage of EBITDA, over at least 24 to 36 months. A business that consistently converts 80 to 90 percent of its EBITDA into cash is a very different asset from one converting half of it, even if both report the same EBITDA. A widening gap between the two is often the first sign that something in the numbers needs a closer look.
We also run a proof of cash, matching reported revenue and costs to bank statements. It is a simple test, and in smaller or founder-run businesses it is often the quickest way to confirm that the revenue is real.
3. Working Capital
Working capital affects value in two ways. It determines how much cash the business needs to run day to day, and in most transactions it feeds directly into the price through a working capital adjustment at completion.
Buyers should review receivables, inventory and payables month by month, not just at the year end. Rising debtor days or a build-up of old receivables can point to collection problems or disputed revenue. Slow-moving inventory ties up cash and may need to be written down. Stretched creditor days may look efficient, but they can also mean suppliers are being paid late to improve the closing balance sheet.
The aim is to agree a normal level of working capital, often called the peg, based on average monthly balances and adjusted for seasonality. If the peg is set too low, the buyer may have to put cash into the business soon after completion.
4. Customer Concentration
Buyers need to know not just how much revenue the business earns, but how secure and repeatable it is. Contracted, recurring revenue deserves a very different multiple from project or one-off income, even when both sit in the same EBITDA.
When one or two customers account for a large share of revenue, the business carries more risk than the EBITDA number suggests. Losing a major account after completion can take out a significant part of the profit, and the buyer has very little time to respond.
We look at revenue by customer over several years, retention and churn, contract terms, renewal dates and any change-of-control clauses. We also ask who actually owns the relationship. If the key accounts are held personally by the founder, concentration risk and key-person risk become the same problem.
5. Debt and Debt-Like Items
Reported borrowings rarely capture everything a buyer will end up paying for. Most deals are priced on a cash-free, debt-free basis, so anything that behaves like debt should come off the price.
Beyond bank loans, this includes lease liabilities, unpaid or deferred taxes, employee obligations such as unfunded pensions, gratuity or end-of-service benefits, accrued bonuses, overdue supplier payments, customer deposits and deferred revenue that has already been collected, related-party loans, and any pending tax assessments or litigation. The names vary by country, whether it is VAT in the UK and Europe, GST in India and Australia, or payroll and sales taxes in the US, but the principle is the same.
Each of these needs to be identified, quantified and agreed with the seller as part of the net debt definition. Items that are uncertain, such as an open tax assessment, are better handled through a specific indemnity or an escrow than left to argument after completion.
6. Capital Expenditure Requirements
Some businesses need regular investment in equipment, technology, infrastructure or other assets to maintain their operations.
A business may report strong EBITDA, but if it needs heavy investment every year just to stand still, the cash available to the buyer is much lower. EBITDA, by definition, ignores this.
Buyers should separate maintenance capex from growth capex and compare historical spend with depreciation. Holding back spending in the 12 to 24 months before a sale is a common pattern. It flatters cash flow in the short term and leaves the buyer with a catch-up bill.
7. Founder Dependence and Key-Person Risk
In founder-led businesses, much of the value sits with one or two people. They hold the customer relationships, negotiate with key suppliers, approve every significant payment and carry knowledge that has never been written down.
None of this shows up in EBITDA, but it shapes what the earnings will look like once the founder steps back. Buyers should map which decisions and relationships depend on the founder, test whether a capable second line of management exists, and agree retention or transition arrangements well before completion.
8. Current Trading and Forecasts
Historical numbers tell a buyer where the business has been. The price, however, is usually set on where it is going.
Buyers should look closely at trading since the last year end and compare year-to-date results with budget. If the business has regularly missed its own budgets, the forecast in the information memorandum deserves a healthy discount. If recent months are running below the historical figures being used for valuation, the EBITDA on which the price is based may already be out of date.
9. Tax Exposures
Tax rarely shows up in EBITDA, but it can be one of the largest costs a buyer inherits. Common issues include under-declared indirect taxes, transfer pricing on intercompany transactions, payroll taxes and contractor classification, and, for businesses that sell across borders, US state sales tax obligations or permanent establishment risk in other countries.
In a share deal, historical tax exposures stay with the company and therefore pass to the buyer. They should be identified and quantified early, so they can be priced in or covered through tax indemnities and escrow.
10. Accounting Basis, Controls and Reporting
Before any multiple is applied, the earnings need to be on a consistent basis. Many smaller US businesses report on a cash or tax basis rather than accrual. Local GAAP in India, the Middle East or parts of Europe can differ in important ways from the IFRS or US GAAP framework a buyer reports under. In hyperinflationary economies such as Türkiye, restated figures can look very different from the local statutory accounts.
Controls matter just as much. Many mid-sized businesses run on informal controls that work because the founder sees everything. Those controls tend to break down at a change of ownership, when the founder is less involved and new reporting demands arrive. Buyers should review how revenue is recognised, how the month-end close works, and whether management accounts reconcile to the audited or reviewed financial statements. Weak controls do not always reduce EBITDA today, but they raise the risk that the numbers the buyer relied on were never reliable in the first place.
Turning Findings into Deal Terms
Due diligence findings only protect a buyer if they make their way into the transaction documents. Normalised EBITDA feeds the price. Debt-like items feed the net debt deduction. Known exposures can be covered through specific indemnities, escrows, holdbacks or, increasingly, warranty and indemnity insurance.
The price mechanism also shapes where diligence effort goes. Under completion accounts, common in US and Indian deals, the working capital peg drives an adjustment after closing. Under a locked box, which is more typical in the UK and Europe, there is no adjustment once the locked box date has passed. The quality of that balance sheet and the protection against value leaking to the seller before completion then become far more important.
Where future performance is uncertain, for example because of customer concentration or founder dependence, an earn-out can bridge the gap between what the seller expects and what the buyer is willing to pay upfront. Earn-outs need careful drafting, with clear definitions of the earnings metric, the accounting policies to be applied and the founder’s role during the earn-out period. Without that, they become a source of dispute rather than a solution.
EBITDA Is Only the Starting Point
EBITDA is an important measure, but it is where the analysis begins, not where it ends.
A good due diligence review should tell a buyer how sustainable the earnings are, how much cash the business really generates, what working capital it needs, how dependent it is on a few customers or on the founder, and what obligations come with it. Just as importantly, it should show the buyer how to reflect each finding in the price and the deal terms.
At Hillpine, our team of ex-Big 4 professionals has delivered financial due diligence and Quality of Earnings work on more than 100 transactions across India, the UK, Europe, the US, Australia and the Middle East. If you are evaluating an acquisition and want a clear view of what sits behind the EBITDA, we would be glad to talk. That applies whether you are a private equity fund, a corporate acquirer, or an advisory firm looking for experienced diligence support on your own engagements.