PE Is Not Buying EBITDA. It’s Buying Confidence.

Markets do not reward history; they discount uncertainty

“We don’t pay for last year’s EBITDA. We pay for the confidence we can grow next year’s.”

The remark, delivered without theatrics by a mid-market private equity partner, is inelegant but accurate. Multiples are not a reward for past excellence; they are a probability-weighted forecast of future execution. In lower mid-market SMB industrial deals, the real negotiation is not over price but over conviction.

This is why the same company can receive wildly different valuations from different buyers. The spread is not sentiment; it is risk discounting. PitchBook estimates that fewer than three percent of owner-led firms successfully complete a traditional sell-side process, while capital concentration continues to narrow toward funds with scale and confidence in post-close lift.

McKinsey’s study Beyond the Hockey Stick finds that roughly ten percent of firms capture more than eighty percent of total economic value creation over a decade. The distribution is not linear; it is a power law, and private capital prices accordingly. The pricing function is therefore a risk-adjusted forecast: is this company one of the ten percent that can compound, or one of the ninety percent that will merely endure? The buyers that are still deploying are selective, not generous.

Underwriting is the sorting mechanism.

Owners think they are being judged; the risk they absorb is being underwritten

The key misunderstanding among owners in industrial SMB manufacturing is that investors are pricing the business as it exists today. They are not. They are pricing how much of today’s EBITDA will still be standing once the owner leaves the room—and how quickly a buyer can compound it thereafter. A clean P&L does not answer that question. A QoE cannot answer it either. Only the operating system of the company can.

The underwriting sequence is blunt. First: “Is this company durable without the current owner?” Second: “Can we institutionalize what works without overpaying for the privilege?” Third: “Is the growth story credible inside the four walls, not just in the offering memorandum?” The multiple is not a judgment of worth but an output of underwriting: the present value of future net cash flows and terminal value. It is then discounted by the capital injections and execution risk required to achieve them.

Growth is not rewarded; legibility is

In one recent diligence discussion, the room stalled on the simplest of questions: “What business are we actually buying?” The owner had healthy EBITDA, a loyal customer base, and sensible unit economics. The problem was strategic drift. Five initiatives were being pursued at once, each potentially attractive, but none coherent. What looked like optionality to the operator appeared as drift to the buyer. The haircut was not punishment. It was uncertainty, priced.

Bain’s research on adjacency moves in industrial firms finds that more than 70 percent of unfocused expansions underperform their core, not because the markets are unattractive but because the operating system was never built to carry that variety.

This is the quiet truth of lower mid-market industrial underwriting: most valuation erosion is not caused by obvious weaknesses but by ambiguous intentions. Buyers can underwrite a bottleneck in a manufacturing or industrial SMB environment. They can underwrite a thin bench. They can even underwrite cyclicality if there is discipline in cash conversion. What they cannot underwrite is a company without a crisp answer to “why this model, at this scale, with this focus.”

Owner-reliance is therefore not the root concern; it is merely the most visible proxy for something larger: concentration of judgment. When all strategic direction lives in one head, the buyer assumes execution risk remains unpriced. The same dynamic applies to firms with sprawling initiative sets, product creep, or half-adjacent expansions justified only by “customers asked for it.” The fear is not mismanagement. The fear is diffusion.

For investors, confidence is not a feeling; it is infrastructure. It shows up in routinized decisions, reliable reporting cadence, constraint-aware capital allocation, and a recognizably bounded strategy. Growth, in that context, is not a hope but a process, and what many owners call exit readiness is simply the point at which the operating system becomes legible to a buyer. The more predictable the process, the narrower the haircut.

This is why the best offers do not reward scale so much as clarity. A smaller firm with a defensible core and visible path to systematized expansion will often outprice a larger firm with a blurred identity. Size without focus is not resilience. It is leverage without a thesis.

The market’s selectivity is frequently misread as stinginess. It is better understood as underwriting discipline. When capital is choosy, ambiguity is expensive. What is being purchased is not the last twelve months of performance but the institutional momentum of the next thirty-six.

In the end, what is being priced is legibility.

A company easy to read is a company easy to scale.

Originally published on LinkedIn. Updated and republished here with additional insights.

The Silver Tsunami Meets a Capital Squeeze

How owners in their 60s can decide, without romance or panic, whether to sell now or invest and sell later.

Anne (not her real name, to protect her employees) faces a familiar choice. She is 63, runs a tidy fabrication shop that does CNC machining and precision lathing, employs 14 people, and earns about $2 million in EBITDA. Private equity buyers have called many times. The choice appears simple: take the check and exhale, or keep operating and revisit a sale in a few years. There is no formal succession plan, and reporting still revolves around the owner. Anne’s aim is ordinary and admirable: do what is best for her family, her employees, and her customers.

The backdrop argues for discipline rather than drama. According to the U.S. Census Bureau, more than half of business owners are 55 or older, which means a lot of succession decisions are coming. At the same time, PitchBook and McKinsey describe a K-shaped private equity climate, where the largest funds continue to attract an outsized share of commitments while smaller deals face choosier capital. Translation: larger, more professionally-run companies are seeing attractive deals while smaller, owner-operated businesses are seeing fewer and riskier deals.

So how does an owner decide? Treat it as a capital allocation problem. Put two paths on the same footing:

• Sell-now path: after-tax cash at close, plus the expected value of any rollover. (Earn-outs may be off-limits if the deal relies on SBA debt.)

• Invest-then-sell path: after-tax exit proceeds on higher EBITDA and, if earned, a better multiple, minus owner out-of-pocket capex after tax shields and realistic financing, plus the present value of operating cash while you hold the business. Then probability-weight the plan and apply an owner-specific risk haircut.

That last term, cash while you wait, is often ignored. It should not be. On a $2 million EBITDA base with sensible cash conversion, it is not pocket change.

Policy also matters. The current toolkit leans toward investing in manufacturing at home, even if trade policy keeps everyone on their toes.

Advantages that favor staying and strengthening

• Accelerated expensing for equipment. The latest tax rules restore 100% bonus depreciation for qualifying property. There is also a new elective 100% allowance for certain production assets. In plain English, a CNC lathe or automation cell with a real payback can be expensed up front, which improves after-tax returns and shortens breakeven. Policymakers are using the tax code to encourage domestic production, and owners can use that nudge to fund practical upgrades.

• SBA programs with higher-impact options. Standard 7(a) and 504 loans remain the backbone for smaller companies, and the new MARC revolving-credit channel is designed to broaden working capital for manufacturers. None of this replaces bankability, but it can lower the owner’s cash flow risk and smooth the path when paired with modest leverage and credible paybacks.

• Repatriation intent, practical effect. Taken together, full expensing and manufacturer-focused credit are a signal. Washington wants more production at home, and it is trying to make domestic capex cheaper and financing more available.

The offset: tariff and policy uncertainty

Tariffs and related documentation rules have moved more than once in recent years. Metal-heavy shops felt that quickly in landed costs and lead times of raw materials. The practical response is not fatalism, it is resilience planning. Assume more noise in input prices and delivery schedules, and stress-test your plan for cash flow risks with professional treasury management.

What actually improves outcomes on the 'stay' path

• Resilience in structure. Reduce key-person dependence, diversify top-customer exposure, and update a simple monthly reporting pack that includes a P&L, a cash bridge, a trailing twelve month view, orders, backlog, on-time delivery, and scrap or rework. Add one capable manager under the owner. Buyers pay for Resilience, not personality.

• Resilience in earnings. Invest where cash conversion improves. For a shop like Anne’s, that usually means quick-change tooling, program standardization, removing the bottleneck cell, and tightening pricing and procurement. Vanity capex is banned. Every material dollar should show up in unit economics or in demonstrable, sellable capacity.

• Resilience in financing. Use accelerated expensing and appropriate SBA, USDA, or conventional mixes to lower the equity check without over-gearing. Share a detailed business plan with your lender that covers use of funds, paybacks, KPIs, and the monthly reporting pack. Treat the first quarter as a proof-of-execution window.

There remain honest reasons to sell now. If the odds of executing a short list of improvements are low, for example a thin bench, concentrated revenue, or volatile demand, or if personal constraints loom, for example health, energy, or appetite for another cycle, certainty is valuable. A sale with rollover can be a pragmatic middle path, but remember that you are underwriting someone else’s execution and timeline.

Back to Anne. We ran her numbers two ways. Sell now, and she likely nets about $5 million after tax. That estimate assumes typical lower-middle-market multiples for owner-dependent shops and a blended capital-gains rate that varies by state. Invest, then sell, and the picture shifts. One senior hire, two process upgrades with measured paybacks, a modest tuck-in to smooth customer concentration, and disciplined pricing could plausibly lift EBITDA by a quarter to a third over four years. With accelerated expensing on qualifying capex and steady operating cash along the way, our estimate for a four-year exit is nearly $10 million after tax, nearly doubling the economic value created for Anne. These are estimates, not promises. Execution and cycles matter.

Three rules keep the exercise honest:

1. Stress-test conservative, base, and ambitious cases. If it only works in ambitious, it does not work.

2. Bring in the banker early, not late. Show paybacks and the monthly pack.

3. Plan at the household level. Liquidity timing, taxes, estate planning, and portfolio risk need to fit together. A qualified wealth advisor should sit at the table before numbers harden.

Where does that leave owners? In a selective market, Resilience is the product. The decision is not whether to retire or grind, it is whether value can be created, reliably, before you sell. If yes, build Resilience and harvest cash. If not, price for certainty and move on.

Originally published on LinkedIn. Updated and republished here with additional insights.