How to justify valuation in LOI?

March 06, 2025

by a searcher in Washington, DC, USA

Hi
I am curious to know what data points and sources have folks used to come to a multiple / valuation for any business? And how do you put it in an LOI? e.g., my valuation is based on xyz facts (where do you find comps?, , etc.)

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Reply by a searcher
from University of Toledo in Shaker Heights, OH, USA

Novel approach we take.... state the Free Cash Flow multiple range you are willing to offer (e.g. 2x to 4x FCF) Why? Until you have all of the underwriting data, you can at best "guess" by using a non exact measurement like EBIT(DA) in an SMB transaction. I've made some assumptions here, but I'm assuming you are going to utilize debt in your cap table? If so, DSCR will be the fulcrum for a material aspect of your senior debt. Lastly, I take it you are engaging in this activity to see a return on investment? If so, you can only spend and save "real cash", such as dividends. Reach out to SMB Law and see their template LOIs (asset and stock). As for valuation data in the SMB world, BVR is a great starting point...but there is a lot more data out there if you know where to look.

Reply by a searcher
from Bentley University in Exeter, NH 03833, USA

Hi ^redacted‌. From my experience you do not need to share or justify your valuation in an LOI, and that isn't the appropriate forum to present your valuation or assessment. That should be a conversation with the Seller's broker before you even draft your LOI, or issue one. You need to learn about all the factors at play, and Seller's motivations and wishes. In terms of locating comps, etc. DealStats and GF Data. But both require subscriptions, if I recall. And remember, settling on a valuation is a process and a push-pull. I would encourage lots of dialogue, and understanding other motivating factors around the sale versus reducing solely to price and EBITDA multiple, based on comps.

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