The size staircase
Buyers pay more per dollar of earnings for larger companies. Part of that is financing: larger deals attract more lenders and more buyers. Part is risk: a business with $10M of EBITDA has usually already solved the problems a business with $2M has not, such as depending on its founder, on a handful of customers, or on informal systems.
| Adjusted EBITDA | Typical EBITDA multiple |
|---|---|
| $1M to $2M | 5.0x |
| $2M to $5M | 6.0x |
| $5M to $10M | 7.0x |
| $10M and up | 8.5x |
Illustrative gradient. Actual multiples vary by sector, cycle, and buyer type.
The steps in that staircase are illustrative, but the shape matters. A business that moves from one band to the next is not only worth more because its earnings are higher. Buyers may also pay a higher multiple of those earnings. In the playbook's illustrative example, a combination that takes two businesses with $3M of EBITDA each to $6M can move both of them up a step.
That is the case for getting bigger before you sell. It is also why the case has to be made carefully: a combination is only worth what a buyer will believe about it.
The category ladder
Size is one way up. Category is the other. Buyers price the category before they price the company, and the playbook's category ladder shows five rungs, each with its own place in the range.
| Rung | Category | What buyers see | Typical band |
|---|---|---|---|
| 5 | Scarce asset or platform | Only a few of its kind; buyers must have it | Above the range |
| 4 | Technology-enabled services | Software or data creates margin and a moat | Top of the range and beyond |
| 3 | Systematized services | Runs without the owner; recurring revenue | Upper middle |
| 2 | Established contractor or operator | Good reputation, owner-driven sales | Middle |
| 1 | Job shop or lifestyle business | The owner is the business | Bottom |
Illustrative. Climbing a rung is not a rebrand. It is eighteen months of evidence.
A combination can move a business up the ladder as well as up the staircase. If the business you combine with brings a capability you lack, such as software that runs estimating, ordering, and delivery, or a specialist service with higher margins, the combined company may belong in a higher category than either did alone.
That is only true if the new category can be proven from the numbers and the operations. A roofing business with proprietary software can be marketed as a contractor or as a technology-enabled platform. Same earnings, different multiple. The difference is not the pitch. It is whether a buyer can see the higher category in how the business actually runs.
Which combinations are worth doing
Not every combination is worth the effort. The playbook's combination matrix judges a potential deal on two questions: how much strategic lift does it add, scale only or a new capability, and how risky would it be to integrate?
- The premium play: a new capability, low integration risk. A specialist with higher margins that changes the category of the combined business. Acquire or merge at least eighteen months before an exit, so the combined trailing numbers are clean.
- Do it if the numbers work: scale only, low integration risk. The same trade in an adjacent geography. It moves you up the size staircase. Model the combined multiple, and structure the purchase with seller paper.
- Partner first: a new capability, high integration risk. The capability is real, but integration is uncertain. Start with a joint venture or a subcontracting pilot, and turn it into a combination only if it works.
- Skip: scale only, high integration risk. Scale without lift, and hard to integrate. Sell separately.
The question running through all four is the same: can the combination be proven to a buyer, and can it be done before the exit? A combination still being integrated when buyers arrive is a risk to be priced, not a story to be paid for.
Before any combination, model it the way a buyer will see it: the combined adjusted EBITDA after the costs of integration, the combined business's place in the range, and the debt or seller paper the purchase leaves behind. A combination that looks good at the top line can look very different once the integration costs and the new obligations are in the numbers. Combining also brings its own risks: two cultures, two sets of systems, and two customer bases that may not all stay.
Structuring with seller paper and earn-ins
A founder buying another business before selling their own meets the same questions a buyer will later ask, from the other side of the table: how much to pay in cash, how much over time, and how much only if the business performs.
Two tools help. Seller paper, a seller note, lets you pay part of the price over time, as a loan from the owner of the business you are acquiring. It reduces the cash you need at closing and keeps that owner invested in a smooth handover. An earn-in lets the owner you acquire from earn part of the price, or a stake in the combined business, over time as it performs. It keeps them committed after closing, and it means you pay in full only for results that actually arrive.
Both tools also become part of the combined business that a future buyer will read. A seller note is debt that a later buyer will expect to be repaid at closing. An earn-in still running when you sell is a commitment someone will have to honor. Your attorney and CPA structure the details. The point is to choose structures that will still make sense to the next buyer.
The eighteen-month rule
The most important rule for a combination before a sale is about timing. Buyers price trailing numbers. A combination needs time to show up in them: a full year of combined results, and the months before that to integrate the two businesses so those results are clean.
That is why the playbook's premium play comes with a timeline: acquire or merge eighteen months or more before the exit. Any less, and a buyer is looking at two sets of history, integration costs that may or may not recur, and a combined business that has not yet shown it works. Instead of paying for the combination, the buyer discounts it.
When buyers do arrive, they will test whether the combination has worked. Did the acquired customers stay? Is the new capability used across the business, or only where it started? Do the margins of the combined business reflect the higher category it claims? Each of those questions is answered by time and evidence, which is why the eighteen months matter.
Done early enough, a combination is one of the few moves that can change both the size of a business and its category at once. Done late, it adds risk at exactly the moment a founder needs the business to hold still. If you are thinking about it, think about it now.