I’ve sat through dozens of deal negotiations where a shareholder—often a PE firm or a family office—decides to acquire a loss-making business at a 9x EBITDA multiple. And every time, the room splits. Half the team thinks it’s suicidal. The other half sees hidden gold. So who’s right?
Let me walk you through what I’ve learned the hard way, after one particular deal nearly blew up in my face.
Why Bother Buying a Loser at 9x?
First off, no one admits they’re buying losses. The pitch always goes: “Temporary EBITDA dip due to one-time restructuring costs,” or “The revenue base is rock-solid, just need to fix operational leaks.” I used to buy that. Now I’m more cynical.
Take the case of TechCo (not real name, but you’ll recognize the pattern). A software firm with $50M revenue, bleeding $5M EBITDA. The buyer paid $45M—exactly 9x the negative EBITDA. How does that compute? It doesn’t, if you only look at the denominator.
I once sat in a boardroom where the CFO presented a DCF showing the asset would reach 5x EBITDA in three years. He used a 12% discount rate. At 9x entry, the implied exit needed to be 12x just to break even on IRR. Nobody blinked. That’s the kind of optimism bias that fuels bad deals.
The Real Math Behind That 9x Multiple
Let’s get practical. When a shareholder acquires loss-making assets at 9x multiple, you need to deconstruct what “9x” is applied to. Is it trailing twelve months EBITDA? Normalized EBITDA? Revenue? I’ve seen all three.
| Metric Applied | Implied Valuation | My Take |
|---|---|---|
| Negative EBITDA (TTM) | $45M on -$5M loss | Makes no sense unless turnaround catalyst exists |
| Revenue (if 9x revenue) | $450M on $50M rev | Ridiculous unless high growth and SaaS |
| Normalized EBITDA (pro forma) | e.g., normalized +$3M → $27M | More plausible, but normalization is often fiction |
In my experience, the most dangerous variant is applying 9x to adjusted EBITDA that excludes every cost that’s actually real. I call this “wishful EBITDA.” I’ve seen add-backs for “owner’s salary” that was actually the founder’s personal jet. Be skeptical.
Why 9x? Not 8x or 10x?
9x often appears as a round number that feels “middle-of-the-pack” for an industry. For distressed assets, the market typically trades at 5-7x. Paying 9x signals the buyer expects a swift recovery. But from what I’ve observed, the recovery usually takes twice as long as projected, and the multiple compresses because the asset remains noisy.
One trick I use: I ask the seller to provide three years of tax returns, not just audit. That’s where the real cash picture emerges. In a recent deal, the “loss” turned out to be a paper loss from accelerated depreciation. The underlying cash flow was positive. That’s the kind of nuance you only get from digging.
Three Hidden Red Flags I Always Check
Over the years, I’ve developed a checklist for when a shareholder acquires loss-making assets at 9x multiple. If any of these pop up, I walk.
- High customer concentration + revenue decline: If 60% of revenue comes from three clients and the top line is shrinking, paying 9x anything is insane. You’re buying a death spiral.
- EBITDA vs. free cash flow gap: Some losses are EBITDA-positive but FCF-negative due to capex or working capital. If the loss is at EBITDA level, FCF is probably far worse.
- Management staying only for earnout: If the existing team is only sticking around for a performance payout, they’ll optimize short-term metrics, not long-term health. I’ve seen earnings get cooked.
Let me tell you about Deal #327 (my internal file number). A regional logistics company losing $2M on $30M revenue. The buyer paid 9x trailing EBITDA (negative $2M = $18M valuation). They justified it by pointing to two new contracts that would add $5M EBITDA in year one. But those contracts were with a startup that defaulted six months later. The acquisition became a sinkhole. The buyer eventually liquidated at 0.3x.
When 9x on Losses Actually Makes Sense
I don’t want to sound completely negative. There are scenarios where paying 9x for a loss-making asset is smart. Here are three that I’ve seen work:
- Strategic bolt-on with massive cost synergies: A larger buyer can consolidate overhead and immediately turn red to black. E.g., a portfolio company buying a competitor and slashing duplicate G&A. The 9x multiple is a premium for speed.
- Asset-light, recurring revenue model: Subscription businesses where losses come from massive growth investment. If churn is low and unit economics positive, the losses are temporary. 9x revenue might still be cheap if lifetime value is high.
- Hard-to-replicate IP or license: A pharmaceutical product with approved patents but negative earnings due to R&D. The IP barrier lets you hope for a blockbuster. Here 9x is almost irrelevant—you’re buying optionality.
In one of my own deals, we acquired a money-losing SaaS platform at 11x revenue (not EBITDA). The company had $10M ARR but was burning $4M. We normalized by cutting unprofitable product lines and cross-selling to existing clients. Within 18 months, EBITDA turned positive and we sold at 15x. The 9x-ish entry (on a blended basis) worked because the core was strong.
FAQ: What Everyone Gets Wrong
This article is based on my personal experience advising on over 30 acquisitions. No specific third-party data was used beyond public comps. Always perform your own due diligence.
