The buyer’s analyst spent three hours on your P&L and fifteen minutes asking about your lease structure, your payroll setup across two states, and whether your largest contract had a change-of-control clause. Then they applied a 3.2x multiple to your EBITDA when comparable deals in your sector were closing at 4.5x to 5x.
Your profitability didn’t change between Tuesday and Thursday. The structural assessment did.
Profitability gets you into the conversation. Structure determines what multiple the buyer’s willing to apply to that profitability. Most owners don’t realize how much value compression happens in the structural layer before the negotiation even starts.
Lease Terms That Create Phantom Liabilities
A buyer doesn’t just inherit your revenue and your team—they inherit your obligations. If your primary location operates under a personal guarantee that won’t transfer, or if the lease has eighteen months left with no renewal option locked in, the buyer’s pricing in the cost and risk of relocating or renegotiating under pressure.
One owner had an 18% EBITDA margin and assumed that would carry the valuation. The lease was month-to-month, which the owner saw as flexibility.
The buyer saw it as a landlord who could double the rent six months post-close or force a move that would disrupt operations and client relationships. They applied a 3.1x multiple and explicitly cited lease uncertainty in the LOI.
Buyers discount for anything that requires them to solve a problem you didn’t solve, especially when that problem sits on the critical path to maintaining revenue. A lease that expires before the buyer can stabilize operations is a structural drag, not a negotiating point.
Multi-State Payroll and Tax Nexus No One Mapped
If you’ve got employees in three states but you’ve only been filing in one, you’ve created a liability the buyer has to either assume or force you to clean up before close. Either way, it compresses the multiple.
Buyers run nexus studies during diligence. If they find you’ve had an employee working remotely in Virginia for two years but you’re not registered there, not filing withholding, and not paying unemployment taxes, they’re not just pricing in the back taxes—they’re pricing in the operational mess of fixing it, the risk of penalties, and the signal it sends about how you’ve been running the business.
One company had strong margins and a clean P&L, but diligence revealed payroll in four states with only two properly registered. The buyer’s attorney estimated $40K in back filings and penalties, but the multiple dropped by a full point. The dollar amount wasn’t the issue—the operational sloppiness was. It made the buyer question what else hadn’t been handled.
Customer Concentration Hidden Behind Contract Language
You might have twelve clients, but if your three largest contracts all have change-of-control clauses that let them renegotiate or walk after a sale, the buyer’s looking at a business that could lose 60% of its revenue in the first six months post-close.
This isn’t about whether those clients will actually leave. It’s about whether the buyer has to reprice the risk that they might.
If your contracts don’t have assignment clauses or if they require client consent to transfer, the buyer’s applying a discount for the uncertainty.
One owner had 18% margins and thought customer concentration was fine because no single client was over 30%. But the top four clients all had contracts that terminated on sale unless the client agreed otherwise. The buyer applied a 3.4x multiple and structured part of the purchase price as an earnout tied to client retention.
The owner thought the earnout was about performance. It was actually about the buyer not wanting to pay full price for revenue they might not keep.
Entity Structure That Doesn’t Match How the Business Actually Operates
If you’re operating as an S-corp but you’ve been running significant operations through a separate LLC that you treat as a disregarded entity, and the buyer’s counsel has to spend two weeks untangling which assets and liabilities sit where, you’re paying for that in the multiple.
Buyers want clean structure: one entity, clear ownership, assets and liabilities that match the operating reality. If your structure’s a result of fifteen years of incremental decisions that made sense at the time but never got cleaned up, the buyer’s pricing in the cost and risk of cleaning it up themselves—or they’re requiring you to do it before close, which delays the sale and introduces execution risk.
One seller had moved operations from California to Nevada but kept the original California entity active for a few legacy contracts. The buyer’s diligence team found the California entity still had an active workers’ comp policy, an old bank account with $3K in it, and two contracts that hadn’t been formally assigned.
The cleanup took six weeks and the buyer dropped the multiple by 0.4x to cover the legal cost and the delay risk.
Structural complexity is a tax on the transaction. Every hour the buyer’s team spends mapping your structure instead of planning integration is an hour they’re not getting value from, and they price that in.
The Value Implication
Profitability tells the buyer how much cash the business generates. Structure tells them how much of that cash they’ll actually keep, how much risk they’re assuming, and how much work they’ll have to do before the business operates the way they need it to.
If you’re six months from wanting to sell and you haven’t mapped your lease terms, your payroll registrations, your contract assignment clauses, and your entity structure against what a buyer will actually see in diligence, you’re leaving multiple points on the table. You won’t know it until the LOI comes in lower than you expected.
About the Author
Tim Corcoran is VP / CFO at CGI Digital in Rochester, NY.