The Number Brokers Always Get Wrong (And It's Not the EBITDA)

I have rebuilt the add-backs on enough deals now to know where the real gap lives. It is almost never the revenue. It is almost never the margins. It is the replacement salary assumption, every single time. Here is what I keep seeing. Broker presents $850K adjusted EBITDA on a $4M IT MSP. The add-back schedule shows owner compensation of $280K added back, replaced with a "market rate manager" assumption of $90K. Clean on paper. The DSCR clears 1.25x at the asking price, and the deal looks fundable. Except a competent operator who can actually run a $4M MSP in New Jersey costs $155K to $170K. Not $90K. That $75K gap flows straight through to EBITDA, which drops to $775K. At 4x, that is $300K of enterprise value, the broker built in with a salary number that will not survive your first year of operations. Why $90K is always the number I have started asking brokers directly where the replacement salary figure comes from. The honest ones say it comes from the seller. The seller tells the broker what they think a manager costs. The seller has not hired a senior operator in 15 years and is thinking about what they pay their office manager, not what they would pay someone to run their business. The $90K figure is not malicious. It is just wrong. What I use instead Before I model anything, I look up two numbers. What does a Director of Operations or General Manager actually earn in the specific market where this business operates, and what does the business actually require from that person day to day? An IT MSP with 18 employees, 200 managed endpoints, and a vendor relationship that needs active management needs a real operator. That person in New Jersey earns at least $150K. On a smaller MSP with 6 employees and mostly break-fix revenue, $110K might hold. The business profile dictates the number, not a generic assumption. What this means for your model On every deal I have looked at where the broker used a sub-$100K replacement salary on a $3M to $8M IT services business, my rebuild has come in $60K to $130K lower on normalized EBITDA. At a 3.5x to 4x multiple, that changes the conversation on price significantly. The broker's job is to present the business at the highest defensible number. Your job is to model what it actually earns with your cost structure. The replacement salary isn't just an accounting exercise. It is your first line of defense against overpaying. Do not let a broker's outdated salary assumption dictate your purchase price. Run your own number before you run anything else.