How to Set a Valuation Range in an LOI: A Searcher's Guide

What Number Should Go in the LOI?

Anchor your LOI on a range, not a point, and build it off the seller's normalized earnings rather than the CIM's headline number. For most middle-market deals that means a band roughly 0.5x to 1.0x wide on the multiple, centered on where comparable businesses of that size and quality actually trade. The range is a commitment to a method, not to a price: it says what you will pay if diligence confirms the earnings, and it leaves you room to move down without renegotiating from scratch.

An LOI valuation range is the price band a buyer proposes before diligence, expressed as a multiple of normalized SDE or EBITDA and subject to confirmation. It is the single most consequential number a searcher writes, because everything after it, the QoE, the bank's appraisal, the final purchase agreement, is measured against it.

Why Does the Range Matter More Than the Midpoint?

Sellers read the top of your range. Lenders read the bottom. You will live in between.

A single number invites a binary response: yes or no. A range invites a conversation about which end applies and why, which is exactly the conversation you want, because it forces the seller to defend the quality of their earnings before you have spent money proving it yourself. It also protects you structurally. When diligence surfaces a customer concentration problem or an add-back that will not survive scrutiny, you are moving within a range you already disclosed, not reneging on a promise.

Too wide and you look unserious, or worse, like you are stalling. Too narrow and you have pre-negotiated against yourself. In practice, a band of about 0.5x on smaller SDE deals and up to 1.0x on larger EBITDA deals reads as disciplined rather than evasive.

What Multiples Should Anchor the Range?

Size drives multiple more than almost anything else in the middle market. The same business at $600K of SDE and at $4M of EBITDA is not the same asset to a buyer: the larger one has management depth, survives the owner leaving, and draws a wider pool of capital. The bands below reflect ranges commonly reported by IBBA Market Pulse and DealStats, and are typical rather than guaranteed.

Typical ranges as commonly reported by IBBA Market Pulse and DealStats. Sector, growth, and customer concentration move a specific deal well outside its band.

Note the overlap between the SDE and EBITDA rows around $1M to $2M. That overlap is where searchers get burned, because a broker quoting "4x" on SDE and a lender underwriting "4x" on EBITDA are describing two very different prices for the same company. If you are unsure which metric applies, start with SDE vs EBITDA before you pick a multiple.

How Do You Get to Normalized Earnings Before Diligence?

You will not get there precisely, and that is the point of the range. But you can get close enough to price responsibly by haircutting the CIM yourself.

Sellers and their advisors present the most flattering version of earnings. Your job at LOI stage is to strip the adjustments that experience says will not survive a quality-of-earnings review:

• Owner compensation normalized to a real market-rate manager, not to zero. If you are buying a business that needs a $150K general manager, that cost is permanent.
• One-time items that recur suspiciously often. A "one-time" legal expense in three consecutive years is an operating expense.
• Personal expenses that are legitimate add-backs only when documented. Undocumented ones are a rounding error at best and a credibility problem at worst.
• Pro-forma growth baked into the trailing number. You are buying the business that exists, not the one in the projection.

Every one of these is contested territory, and add-backs explained walks through which ones hold up. If your haircut moves earnings by more than about 15%, do not just lower your multiple. Say so in the LOI, in one line, so the seller knows which earnings figure your range is built on. Deals die at the QoE stage mostly because the buyer never disclosed that their number was different from the seller's.

What Else Should Move the Range Before You Send It?

Four factors reliably justify pricing at the bottom of a band, or below it:

That last one is the quiet killer. A deal at 4.0x with a normal working capital peg and a deal at 4.0x where the seller sweeps the receivables are not the same deal. State the peg expectation in the LOI, or you have not really named a price. For the broader logic of why buyers and sellers look at identical financials and reach different numbers, see the valuation gap.

How Does Financing Constrain the Range?

If you are using an SBA 7(a) loan, the lender's independent appraisal is a hard ceiling on your enthusiasm. When the financed business value exceeds $250,000, an independent valuation from an SBA-approved Qualified Source is required under SOP 50 10 8, and if that appraisal comes in below your price, the gap comes out of your equity or the deal restructures. The full rules are in SBA 7(a) business valuation requirements.

The practical implication: your LOI range should sit where a credentialed third party can defend it, not where your spreadsheet's most optimistic tab lands. Searchers who price above appraisal reality spend months getting to a re-trade they could have avoided in week one.

Running the target through an independent model before you send the LOI is cheap insurance. ValueAlpha produces a defensible range across income and market approaches, which is useful precisely because it is not your own number, and not the broker's.

Frequently Asked Questions

How wide should an LOI valuation range be?

Roughly 0.5x on smaller SDE-based deals and up to 1.0x on larger EBITDA-based deals. Wider than that and sellers read it as a buyer who has not done the work; narrower and you have given up your diligence adjustment before diligence starts.

Should I put a dollar range or a multiple range in the LOI?

Put a dollar range, and state the multiple and earnings basis it was derived from. A dollar figure is what the seller evaluates. The stated basis is what protects you when the earnings figure changes.

Can I lower my price after the LOI?

Yes, if diligence produces a documented reason: earnings that do not reconcile, an undisclosed concentration, a QoE that rejects add-backs you were given. A re-trade backed by findings is normal. A re-trade backed by second thoughts costs you the deal and your reputation in a small market.

What if the broker demands a single number?

Give the midpoint and immediately state the conditions attached to it. You have not avoided the range, you have just moved it into a sentence.

Key Takeaways

• Anchor the LOI on a range about 0.5x to 1.0x wide, built on your own normalized earnings rather than the CIM's.
• Size drives the multiple: SDE deals under $1M typically clear 2.0x to 3.5x, while EBITDA deals above $3M typically reach 5.0x to 7.0x.
• Haircut owner comp, recurring "one-time" items, and pro-forma growth before you pick a multiple, and disclose your earnings basis in the LOI.
• Customer concentration, owner dependence, and the working capital peg move the effective price as much as the multiple does.
• With SBA financing, the appraisal is the ceiling. Price where a credentialed third party can defend the number.