As owners and investors contemplate an exit, there is always the appeal of going “one more year” before a strategic sale. In theory this makes a great deal of sense, a reasonable EBITDA multiple might add $8–10M in valuation for every $1M in EBITDA growth. Unfortunately, owners often fail to adequately consider the uncertainty introduced by that extra year of growth, and the valuation risk that results. We hear time and again of businesses that were in a very strong position to exit a year or two ago having missed their window and been forced to reset expectations painfully.
The Setup: An Apparently Obvious Decision
Consider a professional services business generating $5M in EBITDA this year, contemplating either seeking an exit now or growing EBITDA by another 20% before exiting. Assuming an 8–10× multiple, the owners are attempting to capture an additional $8–10M in valuation with the additional year. The potential reward might seem clear. When risk-adjusted, however, it is far from an obvious decision.
Risk #1: A Soft “Next Year”
As confident of their backlog and pipeline as owners may be, surprises always happen. If a large client leaves, or the revenue pipeline doesn’t convert as expected, a resulting down year has a catastrophic impact on valuation. The growth trajectory that potential buyers would have found interesting has disappeared, so interest levels and multiples (for a now-plateaued business) follow. If this results in the loss of even 2–3× EBITDA, it equates to a $10–15M decline in valuation.
Owners could decline a lower offer and continue to operate the business, but that flat year stays in the three-year lookback. The business remains a few years away from being able to command a “growth” premium again, even if strong growth were to quickly return. By contrast, had the business been acquired before the softness, sellers would typically be behind an earnout where a flat year would likely be within the earnout collar, negotiated by a knowledgeable advisor, allowing them to still receive a portion of their earnout.
Waiting: Downside Scenario
One large client departure or a pipeline miss in the deferred year can eliminate 2–3× EBITDA from the valuation, a $10–15M swing, while also locking the business out of growth-premium positioning for several additional years.
Exiting Now: Downside Protection
A soft year inside an earnout collar is recoverable, especially within a larger acquirer that brings client opportunities not otherwise available. The full earnout is typically achievable even if a single year underperforms.
Risk #2: Compounded Growth Requirements
Any valuation with a growth premium naturally implies that growth will continue forward, and an earnout mandates as much. Waiting another year before being acquired means that the required growth by the end of a 2-year earnout is 3 years out from today. For a high-growth business, this compounding adds up quickly.
A business growing at 20% needs to be 44% larger at earnout period’s end for the full valuation to be realized if the exit is now, compared to 73% larger if the sellers wait another year. For a 30% growth business, the final year of the earnout would need to be more than double today’s size (+120%) if they delay, versus 69% larger if they exit a year sooner. These are materially different risk propositions.
Like a mirage in the desert, the apparently obvious gains of an extra year may only be illusion. The gains are only ever realized upon continued compounding growth through the earnout; they are not captured at deal close.
Risk #3: Market Shifts
With AI just one factor driving massive disruption across every industry, the risk of disintermediation is no longer theoretical. It would only take the risk of disintermediation for prospective buyers to walk away from an entire category. An irrelevant value proposition with uncertain future value is no longer the small risk that it used to be: the speed of platform-level disruption has compressed the window dramatically.
The Honest Conclusion
All of this is to say that although the gains of an extra year might appear obvious, they are fraught with hidden downside risks that owners consistently underweight. The risk-adjusted return on deferral is unattractive for most businesses in most market conditions, and particularly unattractive in an era of rapid technological disruption.
The right question to ask is not “should I wait one more year?” but rather “am I using this time to close specific, identifiable gaps that will materially shift my valuation outcome?” If the answer is yes, and the gaps can be closed, then preparation is the right move. If the answer is simply “I want one more year of growth,” the math rarely supports the risk.