Valuation is a judgment about future cash and its risk. Diligence is the process of finding out whether the cash you were shown is the cash that exists.
Start a private conversation with the Acquisition Concierge, already scoped to valuation & due diligence. Choose the question closest to yours, or describe your situation directly.
Two distinct questions get bundled together at this stage, and keeping them apart is most of the discipline. Valuation asks what a stream of future earnings is worth given its size, durability and risk, a judgment expressed as a multiple, informed by comparable transactions but ultimately specific to this business and this buyer. Diligence asks a narrower and more answerable question: is what I have been shown true, and what is not in the file? The order matters. A valuation formed before diligence is a hypothesis; a valuation that does not move when diligence produces findings was never a valuation at all. This stage covers how private-company value is assessed, what a quality-of-earnings review tests, and the risk concentrations that most often prove decisive.
Three areas that together determine both what you should pay and whether you should proceed. Each is a distinct discipline with its own specialists.
How private-company value is assessed, normalized earnings, the multiple, and what genuinely moves it.
investigateWhat a QoE review tests, which add-backs deserve scrutiny, and why it is the workstream that most often moves a price.
investigateCustomer concentration, owner dependence, contract quality and competitive position, the risks that survive closing.
investigateHow the Institute helps at this stage, orientation and coordination. The Institute does not perform valuations or audits, and does not verify a seller's information.
Predominantly as a multiple of normalized earnings, most often EBITDA in the lower middle market, sometimes seller's discretionary earnings for smaller owner-operated businesses. The multiple is not a market fact you look up; it is a judgment reflecting size, growth, revenue durability, customer concentration, management depth beneath the owner, capital intensity and sector. Comparable transaction data informs the range and is genuinely useful, but private transaction databases are thin, self-reported and rarely comparable in the ways that matter. Anyone offering a confident multiple before seeing normalized financials is describing a sector average, not your target.
It tests whether reported earnings represent sustainable, transferable cash flow. That means examining revenue recognition, separating recurring from one-off items, scrutinising the add-backs a seller has proposed, checking whether working capital has been managed to flatter the period, and looking for costs the business will incur under your ownership that it does not incur under the current owner's. It is not an audit and does not opine on the financial statements. In the lower middle market it is the single diligence workstream that most reliably changes the price, chiefly because owner-operated companies genuinely blur personal and business expense.
In practice: customer concentration worse than represented, where a single relationship both dominates revenue and is personal to the departing owner; earnings that do not survive normalization once add-backs are examined; an owner more operationally central than anyone acknowledged, so the business being sold is partly the owner; and undisclosed liabilities, typically tax, employment classification or environmental. Culture and integration risk end fewer deals than they should, they are harder to see during diligence and tend to surface only after closing.
It scales with transaction size and complexity rather than following a rule, but buyers who economise here tend to regret it more than buyers who economise anywhere else. A useful frame is to compare the cost of a workstream against the size of the finding it might produce: a quality-of-earnings review costing a fraction of one turn of EBITDA is inexpensive insurance against paying for earnings that are not there. The genuine waste is running full workstreams on questions this business does not raise, a scoped diligence plan is cheaper and better than a comprehensive one.
Describe what you are looking at. The Concierge will help you scope the diligence and identify the specialists it needs.