EBITDA is driving failed deals as Sellers and Buyers clash on valuations
A leading UK construction sector investor has warned that widespread reliance on EBITDA-based valuations is contributing to failed transactions and repriced deals across the market. This comes as higher borrowing costs force buyers to focus on real profitability and real cash flow. Bradley Lay, mergers and acquisitions specialist and co-founder of Peak Capital Group, said the gap between how sellers value their businesses and how buyers assess risk has widened significantly over the past 18 months.
Bradley said: “EBITDA ( Earnings Before Interest, Taxes, Depreciation, and Amortization, a financial metric used to evaluate a company’s core operating profitability and cash flow generation potential by excluding financing decisions, tax environments, and non-cash accounting items) is still being used as the headline valuation metric in construction.
But buyers are underwriting deals on net profit before tax and cash. That disconnect is now one of the most common reasons deals fall over.”
Mr Lay said EBITDA routinely strips out costs that directly affect a business’s ability to survive, particularly in capital-intensive sectors such as construction.
He added: “Tax, debt servicing, capital expenditure, asset replacement and working capital requirements are not optional. They are structural. Removing them may make a business look more attractive on paper, but it does not change economic reality.”
He goes on to say these expectations are proving increasingly untenable as the cost of capital remains elevated and lenders tighten credit criteria. He said: “With debt more expensive and less readily available, buyers cannot afford to rely on adjusted metrics. Acquisition debt has to be serviced from real earnings, not theoretical numbers.
“This is resulting in a growing number of late-stage valuation resets during due diligence, often after sellers have anchored emotionally to an initial headline price.
“Personal expenses, one-off add-backs and aggressive normalisations are routinely challenged or removed. When that happens late in a process, trust erodes and transactions stall.”
Bradley notes that scepticism toward EBITDA is well established among long-term investors, including Charlie Munger, who famously criticised the metric, and Warren Buffet who has repeatedly warned against relying on it as a measure of value.
He said: “In institutional investment, this debate was settled years ago. Sustainable profit and cash flow determine value.”
Further stating that when assessing acquisitions, he focuses on whether a business can operate without founder dependency, generate consistent net profit before tax, convert earnings into cash and reinvest capital at acceptable returns.
Mr Lay said: “One of the biggest mistakes sellers make is hiding behind EBITDA as if it tells the whole story. I looked at a piling and groundwork business that wanted £8 million based on four times EBITDA plus assets. On paper, they were showing £1.8 million EBITDA but once you accounted for depreciation, amortisation, and the debt servicing on all that heavy plant, the real net profit was only £500,000. That’s the number that actually matters.
“It was asset-heavy, had just £70,000 in cash, and was funded by more than ten different debt facilities. At £500,000 true profit, it would have taken me sixteen years just to break even. EBITDA might flatter the headline, but it doesn’t pay the bank or deliver returns.
He added: “Compare that to a cladding and façade business I reviewed making £1.5 million net profit before tax, with a sensible £4.5 million valuation. That’s a three-year break-even even if nothing improves and with the value I know I can add, even faster.
“ (it is) is a useful metric for some comparisons, but when you’re buying a business, especially an asset-heavy one, cash flow, real profit, and return on invested capital are what truly count.”
He said: “Sellers who want credible offers need to focus on clean profit before tax, disciplined cash conversion and balance sheet resilience. Serious buyers are paying for durability and cash, not narrative.”
Bradley Lay is a UK-based construction mergers and acquisitions specialist and co-founder of Peak Capital Group. He began his career in corporate finance before joining a construction business as Group CFO, where he helped scale revenues from £12 million to more than £150 million ahead of a successful exit in 2022.
Since then, he has advised and invested alongside more than 100 construction business owners and oversees acquisitions through Peak Capital Group and a UK-based family office structure, focusing on profitable, established construction and specialist trade businesses across the UK and Europe.
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