Why the Deal’s True Valuation Really Matters
- Christopher von Wedemeyer
- Feb 28
- 5 min read
Let’s take a closer look at how capital structures can affect the true cost of buying a company. Two of the best metrics to understand where your equity actually stands in a deal are recovery points and breakeven points.
What Are Recovery and Breakeven Points?
Recovery Point: The stage at which a particular security (e.g., preferred equity) starts recouping its principal.
Breakeven Point: Where that security has fully recovered its initial investment.
Usually, these points get expressed as a euro amount or a multiple of EBITDA. They give you a clearer picture of when each layer in the capital stack begins making (or getting back) money.
But maybe you’re thinking: “Why bother breaking this down for a simple search fund deal?” Actually, even the standard structure has multiple investor positions, each with its own risk and return profile. Typically you’ll see:
1. Common Equity (held by the searcher and the investors)
2. Preferred Equity (held by investors)
3. Seller Note (the seller’s portion of the financing)
4. Bank Loan (senior debt from a bank)
We focus heavily on equity, since that’s what we hope to profit from. But to really understand the equity’s payoff, you need to figure out where the equity layers begin to see returns and where they end up fully paid—i.e., their Recovery and Breackeven points.
A Sample Deal
Picture a traditional search fund aiming to acquire a business generating €1 million in EBITDA. The headline purchase price is 3.5x EBITDA, or €3.5 million, which sounds attractive.
At Closing | |
EBITDA | € 1,000,000 |
Multiple | 3.5x |
EV | € 3,500,000 |
Working Capital | € 150,000 |
Bank Fees | € 50,000 |
Transaction Fees | € 150,000 |
Total | € 3,850,000 |
However, once you add working capital, closing fees, and other transaction-related costs, the total price creeps up to around 3.85x EBITDA. That’s already a 10% jump from the initial figure that got you excited.
Capital Stack Details
Let’s assume the capital is put together in a standard way: about 9% of the total cost comes from a seller note (10% of the EV, but not including the transaction costs), roughly 50% is financed by a bank loan, and the remaining 41% is covered by equity from the searcher and the investors.
For equity contributions, suppose investors put in €2,325K and receive an 8% preferred return. Note, that over a five-year period, that 8% effectively compounds into a 1.5x multiple (so around €3.5 million). Once you close, you’ve effectively locked in this structure.
Sources Split | Amount | % Total | |
Seller Note | € 350,000 | 9% | |
Bank | € 1,925,000 | 50% | |
Equity | € 1,575,000 | 41% | |
Total Sources | € 3,850,000 | 100% | |
Equity Split | Amount | % Equity | |
Pref Equity | € 1,575,000 | ||
Search Equity | € 750,000 | // €500k x1.5x Step-up | |
Total Pref Equity | € 2,325,000 | 75% | |
Searcher Equity | € - | 25% | |
Total Equity | € 2,325,000 | 100% |
The Day After Closing
Immediately after the purchase, you might think you have a business “worth” €3.5 million (since it’s earning €1 million in EBITDA at a 3.5 multiple) plus €150K of working capital on hand. If you tried to sell the very next day, you’d have to subtract transaction fees, including new fees to exit. You’d quickly see that you’d lose practically all your equity on a same-day turnaround.
Day after Closing | |
EBITDA | € 1,000,000 |
Multiple | 3.5x |
EV | € 3,500,000 |
Transaction Fees | € (100,000) |
Working Capital | € 150,000 |
Total Proceeds | € 3,550,000 |
Seller Note | € (350,000) |
Bank Loan | € (1,925,000) |
Equity Proceeds | € 1,275,000 |
Pref Equity | € (2,325,000) |
Common Equity | € (1,050,000) |
In other words, although 3.5x might appear to be your acquisition multiple, fees and financing layers can push the real starting point in a less favorable direction. Your initial assumption of “I just bought at 3.5x” doesn’t fully account for these additional costs or the fact that any exit would trigger yet another set of fees. Effectively you would need to sell for 4.55x to breakeven—a full turn higher than the entry multiple.
Day after Closing Pref Break Down | |
Transaction Fees | € 100,000 |
Working Capital | € (150,000) |
Bank Loan | € 1,925,000 |
Seller Note | € 350,000 |
Recovery Point | € 2,225,000 |
Pref Equity | € 2,325,000 |
Breakeven Point | € 4,550,000 |
When Does the Searcher’s Common Equity Get Paid?
The searcher (common equity holder) only collects a share of proceeds after the preferred investment is fully covered. In numbers, that means you need to surpass €4,550,000 in value—about 4.55x EBITDA—before you even begin to benefit from your equity stake.
Day after Closing Common Equity Break Down | ||
Transaction Fees | € 100,000 | |
Working Capital | € (150,000) | |
Bank Loan | € 1,925,000 | |
Seller Note | € 350,000 | |
Recovery Point | € 2,225,000 | |
Pref Equity | € 2,325,000 | |
Breakeven Point | € 4,550,000 | |
Common Equity Catch-up | € 581,250 | // 25% of Pref Equity |
After Catch-up | € 5,131,250 | |
Thereafter: 75% Investors / 25% Searchers |
If, for instance, you thought you paid 3.5x EBITDA but you really need the business to be worth at least 4.45x just to get in the money, that means you have to grow EBITDA from €1000K to maybe €1300K just to break even on day one.
If you ended up overpaying—say, 4.0x instead of 3.5x—then you might need to grow EBITDA by 40% for the searcher’s portion to see a single euro.
Overpaying by 0.5x | ||
Transaction Fees | € 100,000 | |
Working Capital | € (150,000) | |
Bank Loan | € 2,175,000 | |
Seller Note | € 400,000 | |
Recovery Point | € 2,525,000 | |
Pref Equity | € 2,525,000 | |
Breakeven Point | € 5,050,000 | |
Required EBITDA to reach Detach Point | € 1,400,000 | // 40% Increase in EBITDA |
Multiple | 3.5x | |
EV | € 4,900,000.0 | |
Working Capital | € 150,000 | |
Total Proceeds | € 5,050,000 |
There is one big caveat to all of this: As the Bank Debt and Seller Note is paid down, the Equity in the business increases, so assuming that after 5 years Bank Debt and Seller Note has been paid back, the business has not grown and is sold for 3.5x, the math would look as follows:
Day after Closing | |
EBITDA | € 1,000,000 |
Multiple | 3.5x |
EV | € 3,500,000 |
Transaction Fees | € (100,000) |
Working Capital | € 150,000 |
Total Proceeds | € 3,550,000 |
Seller Note | € - |
Bank Loan | € - |
Equity Proceeds | € 3,550,000 |
Pref Equity | € 2,525,000 |
Pref Interest | € 1,185,053 |
Common Equity | € (160,053) |
So just buying a business not improving it and selling if for the same multiple after 5 years, does not net any proceeds to the searcher.
The Key Takeaway: Valuation Matters
This might sound like a math exercise, but it has important practical consequences. I’ve seen searchers agree to pay half a turn higher multiple (e.g., 4.0x instead of 3.5x) under the assumption it’s worth it to lock in the deal rather than continue searching. While that’s sometimes valid, you must recognize you’re already “down” about 1x because of fees and the structure itself. Adding another 0.5x on top puts you over 1.5x turns above your assumed entry multiple.
Does that mean you shouldn’t pay the higher price? Not necessarily. The business might still be a great opportunity if it can grow fast enough to outpace those layered costs. But you should walk into negotiations with your eyes wide open about the actual valuation you’re paying for, as well as the thresholds at which different capital layers start getting returns.
In short, don’t let a seemingly low acquisition multiple lull you into overlooking the true costs and payoff sequence in your deal. Know exactly where each tranche attaches and detaches, and you’ll be far better equipped to understand the real value proposition—and your potential upside—when making that acquisition.