Founders ask Collective 54 this 12 times in our records. It usually arrives as a question about multiples and turns out to be a question about which category the market has put the firm in.
Founders obsess over multiples. It is the wrong end of the equation to start from.
Multiples are set by the market. EBITDA is set by your operating model, and founders have far more control over one than the other. A firm that improves the durability and level of its profit does not need a higher multiple to produce a dramatically better outcome.
The arithmetic is worth doing explicitly. Two firms each have $20 million of revenue. One runs 30 percent EBITDA margins and produces $6 million. The other, with delivery genuinely reorganized so that a meaningful share of value creation lives in systems rather than in people, runs 60 percent and produces $12 million. At the same twelve times multiple, one exits at $72 million and the other at $144 million. Same revenue, same multiple, double the price.
That is why the useful preparation happens years before a process starts. Collective 54's founder sold SBI in 2017 for $162 million at approximately ten times EBITDA. Had the firm been labor-based and founder-dependent with thinner margins, it would likely have sold for roughly half that on the same revenue.
Comparables set the multiple, and comparables are chosen by category. This is where real money is won and lost.
The mechanism is the same as a house sale. An investment banker pulls a list of firms in your category that recently sold, expresses each price as a multiple of EBITDA, and applies that to your firm. The category is the neighborhood. Get placed in the wrong one and the arithmetic is wrong from the start.
SBI was originally placed in the sales training category, which was not correct: it was a management consulting firm specializing in sales effectiveness. At the time sales training firms traded at five and a half times EBITDA and management consulting firms traded at nine. Sales training firms were also not perceived as high growth, while SBI had compounded at 30 percent for ten years. Correcting the category moved the multiple from five and a half to nine, and the growth correction moved it from nine to eleven. Those two corrections doubled the multiple and produced tens of millions of dollars of additional wealth.
So the questions to answer before you talk price are category questions. Which firms in your category have recently sold, at what price and on what terms. Which bankers represented them, which investors bid, who won, and why. Is your firm in the correct category, and is that category obvious to a potential buyer rather than something you have to explain. If the answer to the last one is no, fix the perception before you run a process rather than during it.
Founders treat terms as secondary to price. They should not. In boutique professional services it is terms, not valuation, that determine who bears the risk after the deal closes, and two deals with identical headline prices can produce radically different outcomes.
The components that matter most are the proportion of cash at close, the length and structure of any earnout and the hurdles attached to it, the size and duration of holdbacks and escrows, whether equity is rolled over, the representation and warranty period, the noncompete, and whether the founder is required to stay and for how long.
A high multiple with modest cash at close, a five year earnout on aggressive hurdles and a founder lockup is not a better outcome than a lower multiple paid in full. Many founders believe they got market terms and feel disappointed after closing, because the risk was priced not in the headline number but in how little of it was certain.
Deal structure is not primarily a negotiation outcome. It is a structural consequence of how transferable the business is, and it follows a clear pattern.
In labor-based firms, profit depends on people, relationships and founder presence, so buyers structure to keep those in place: modest cash at close, earnouts often running three to five years, aggressive performance hurdles, and strong retention requirements. From the buyer's side this is rational. They are not buying a durable engine, they are underwriting continued behavior. From the founder's side, liquidity is delayed, upside is uncertain, and personal freedom is postponed.
In tech-enabled firms, delivery is systematized and less dependent on individual heroics, so buyers are more confident performance persists. Cash at close rises, earnouts shorten to roughly one to three years, performance definitions get clearer, and full earnout realization becomes considerably more likely.
In AI-enabled firms, where margins are structurally higher and dependence on specific individuals is low, buyers stop asking whether the business will survive and start asking how fast they can scale it. Cash at close rises significantly, earnouts shorten or disappear, and retention mechanisms lighten.
The point is not that earnouts are bad. Properly structured they align incentives and reward growth. They become a problem when they are being used to compensate for a fragile business model, and founders who blame deal structure are often describing an operating model problem in the wrong language.
This is the lever founders most often miss, and it works because buyer types carry customary structures set by their own comparables.
Selling to private equity frequently requires rolling over equity, and many private equity firms will simply walk if you refuse. Selling to a market leader will usually involve an earnout. Investors who fund management buyouts operate on different conventions again.
Collective 54's founder required payment in full at close, no earnout, no equity rollover, and no employment through a transition period. Those terms were unacceptable to the large management consulting firms, whose comparables told them to walk, and to most private equity firms, who objected to the rejection of the rollover. The investors who fund management buyouts looked at exactly the same terms and saw standard practice, and the deal closed there at 100 percent cash at close.
So the sequence is: decide what you want from the exit, then pursue the buyers whose customary terms deliver it. Trying to sell your firm in a way that is foreign to your buyer is close to impossible, and it is hard enough already without a square peg in a round hole.
One warning attaches to this. Be careful not to scare buyers away with an unrealistic structure before you understand what is customary. Understand the common structures in your category first, and then decide deliberately which ones you are willing to break.
Do not name a number early. Founders who are flattered by an approach and blurt out a high figure watch the buyer end the call politely and move on. You do not determine the price, the market does, and a number is worth suggesting later in a process and only if it is market-based. Treat opening bids as data inputs rather than insults, and expect the price to rise as buyers compete over a nine to twelve month process.
And get the tax treatment into the negotiation rather than discovering it afterwards. A dollar amount will be assigned to your noncompete, and that amount is recognized as ordinary income rather than capital gains. Collective 54's founder did not know this at the time of his own sale. His tax lawyer and accountant did, and negotiated the liability down. How the transaction is booked can move the net proceeds materially, which is an argument for hiring the best advisers you can rather than the cheapest.
If certainty matters more to you than headline price, the calculus inverts: take the lower number with more cash at close and fewer contingencies, and say so early enough that you are only talking to buyers who can do it.
If you believe strongly in the next phase of growth and want a second bite, an equity rollover is not a concession but the point, and private equity becomes the natural buyer rather than an obstacle.
And if your firm is genuinely fragile, with revenue concentrated in a few relationships that live with you, resisting an earnout on principle will not produce a clean deal. It will produce no deal. The fix is upstream, in the operating model, and that takes years rather than months.
Price is durable EBITDA times a multiple, and since multiples are set by the market and EBITDA by your operating model, the leverage sits in margin rather than in negotiation: the same revenue at 60 percent margins instead of 30 produces double the exit price at an identical multiple. The multiple itself comes from comparables, so establish that you are in the correct category before you discuss numbers, because miscategorization is the most expensive avoidable error in a boutique sale. Then treat terms as equal to price, because cash at close, earnout length and hurdles, holdbacks, equity rollover, representation periods and founder lockup decide how much of the headline you actually receive. Structure follows transferability: labor-based firms draw long earnouts and lockups, tech-enabled firms draw one to three years, AI-enabled firms draw mostly cash. Decide what you want from the exit first, then pursue the buyers whose customary structure delivers it, since your terms select your buyer. Name no number early, and negotiate the noncompete allocation, which is taxed as ordinary income.
The multiple is set by comparables, meaning recent sales of firms in your category, so the more useful question is whether the market has put you in the right category. SBI was initially placed in sales training, which traded at five and a half times EBITDA, when it was really a management consulting firm specializing in sales effectiveness, a category trading at nine times. Correcting the category and then the growth classification moved the multiple from five and a half to eleven, which doubled the price. Confirm your category, and confirm it is obvious to a buyer rather than something you must explain.
They are not separable, and structure is routinely underweighted. Terms determine who bears risk after closing, so two deals at the same headline price can leave a founder in completely different positions. A high multiple with modest cash at close, a five year earnout on aggressive hurdles and a founder lockup is worse than a lower multiple paid in full. Founders who believe they got market terms and feel disappointed afterwards usually find the risk was priced in how little of the number was certain rather than in the number itself.
You can, and doing so narrows your buyer pool in a specific and predictable way, which can be an advantage if you understand it. Private equity frequently requires an equity rollover and will walk if refused. Market leaders usually require an earnout. Investors who fund management buyouts work to different conventions. Collective 54 founder Greg Alexander required full payment at close with no earnout, no rollover and no transition employment, which removed both strategics and traditional private equity and closed the deal with management buyout investors at 100 percent cash. Your terms select your buyer.
Structure follows transferability. Labor-based firms, where profit depends on specific people and founder presence, typically see modest cash at close, earnouts of three to five years, aggressive hurdles and strong retention requirements, because the buyer is underwriting continued behavior rather than a durable engine. Tech-enabled firms see higher cash at close, earnouts of roughly one to three years and a much higher chance of full realization. AI-enabled firms, with higher margins and low individual dependence, see significantly more cash at close and earnouts that are short or absent.
Sources: Greg Alexander, Why Some Boutique Firms Exit Cleanly and Others Never Really Do (Collective 54), for the argument that multiples are set by the market while EBITDA is set by the operating model, the $20 million revenue comparison between a 30 percent and a 60 percent margin firm producing $72 million and $144 million exits at the same multiple, the SBI transaction at $162 million and approximately ten times EBITDA with 100 percent cash at close and no earnout or equity roll, the counterfactual that a labor-based version would likely have sold for roughly half, and the pattern of deal terms by operating model including earnout lengths of three to five years for labor-based firms and one to three years for tech-enabled firms, plus the point that earnouts are not inherently bad but become a problem when they substitute for durability. Greg Alexander, The Boutique: How to Start, Scale, and Sell a Professional Services Firm (Advantage, 2020), chapter 42 for comparables as the mechanism that sets both price and terms, the house sale analogy, the SBI recategorization from sales training at five and a half times to management consulting at nine and then to high growth at eleven, and the observation that certain buyers require certain deal terms so sellers should pursue buyers whose terms align with their reasons for selling; chapter 48 for not naming a number early, the market rather than the owner setting price, opening bids as data inputs, the nine to twelve month process, the warning against scaring buyers with an unrealistic structure, and the noncompete allocation being recognized as ordinary income rather than capital gains.
Collective 54 is the private community for founders and executives of boutique professional services firms between $5M and $50M in revenue. Members work these answers against their own numbers.