Valuing Businesses with Volatile EBITDA: Strategies for Smart Buyers

TLDR

When faced with a business showing sudden EBITDA growth right before sale (like jumping from $625K to $1.045M in one year), smart buyers should: (1) investigate why the growth occurred and if it’s sustainable, (2) consider using a weighted or multi-year average for valuation rather than the most recent figure, (3) speak with lenders early about how they’ll view the volatility, and (4) use deal structures like forgivable seller notes or earnouts to protect against downside risk while still offering fair value.

Introduction

Picture this: You’ve found a promising acquisition target. The business checks most of your boxes—good industry, manageable size, solid reputation. Then you review the financials and notice something striking: EBITDA has nearly doubled in the most recent year, right before the owner decided to sell.

Is this perfect timing or perfect manipulation?

This scenario plays out frequently in small business acquisitions, particularly in industries with project-based revenue or variable cost structures. As a buyer, your challenge is to distinguish between sustainable improvements and temporary spikes—all while crafting an offer that’s competitive enough to win the deal but protected enough to avoid overpaying.

This article draws on insights from dozens of experienced searchers and advisors who have successfully navigated this common valuation challenge. Whether you’re evaluating your first acquisition or your fifth, you’ll find practical strategies to value businesses with volatile or rapidly increasing EBITDA.

If you’re evaluating a small business acquisition and see a significant jump in EBITDA—especially in the year the business is being sold—it can raise a tough question: how should you value it?

This is a common situation in industries like HVAC, where operational efficiencies, changing revenue mix between service and construction, or major contract wins can lead to large swings in profitability. A recent Searchfunder discussion tackled this head-on, with one searcher noting EBITDA grew from $575K (2022) to $625K (2023) to $1.045M (2024). That’s an 80% jump in a single year. But is it real, and more importantly, is it repeatable?

In this guide, we break down how experienced buyers, advisors, and lenders recommend evaluating businesses with volatile or rapidly growing EBITDA—and how you can structure a deal to protect yourself without losing the opportunity.

Step One: Understand Why EBITDA Changed

Before you run any numbers or apply a multiple, stop and investigate why EBITDA is changing. Every financial story has a driver, and it’s your job to uncover it. For HVAC businesses specifically, this is critical as revenue can fluctuate between construction projects and recurring service contracts.

• Did revenue grow alongside EBITDA, or is this purely cost-cutting?
• What’s the customer mix? Was growth driven by new customers or one-time large projects?
• What’s the ratio of service revenue (typically recurring) vs. construction/installation revenue?
• Were there operational efficiencies such as cost-cutting or headcount reduction?
• Did margins improve due to pricing power or renegotiated vendor terms?
• Were any expenses deferred or capitalized?
• Are financials on cash or accrual basis? This can significantly impact EBITDA recognition.

This step can’t be skipped. As one searcher noted:

“Without understanding the cause of the jump, a response would be nothing more than a guess.” — Michael Koo, Solo Searcher

If EBITDA doubled in the year the seller decided to exit, that doesn’t necessarily mean it’s not real—but it does mean you should be skeptical until proven otherwise.

Valuation Methods: How to Normalize the Numbers

Once you understand the story behind the numbers, it’s time to apply a valuation approach. There’s no one-size-fits-all answer, but here are the most common methods buyers use when EBITDA is volatile or trending sharply:

1. Three-Year Average EBITDA

This is the most conservative approach and helps smooth out volatility.

• Pros: Reduces the risk of overpaying for an unusually strong year.
• Cons: May undervalue a business that is genuinely growing.

“Always red flags when you see EBITDA double the year they decide to sell. I’d take an average of the last three years after adjustments and go from there.” — Dave Gilbert, CEO, Proven

2. Weighted Average EBITDA

A compromise that gives more weight to recent performance while still factoring in prior years.

• Pros: Reflects growth without over-reliance on a single year.
• Cons: Still subject to judgment—what weights should you use?

“With an upward trend, a weighted average makes more sense than a simple average.” — Andrew Evarts, Searcher

3. TTM or Run-Rate EBITDA

Using the Trailing Twelve Months or forward-looking EBITDA may be appropriate in fast-growing businesses—if you believe the growth is sustainable.

• Pros: Aligns price more closely with future earnings.
• Cons: Highest risk—especially if growth isn’t proven.

“If diligence indicates the 2024 jump is sustainable, you’ll likely have to bid against TTM EBITDA to be competitive.” — Josh Warren, Apex Growth Capital

Valuation Methods in Action: A Practical Example

Using our example business with EBITDA of $575K (2022), $625K (2023), and $1.045M (2024), here’s how each method would value the business at a 4x multiple:

Three-Year Average: ($575K + $625K + $1.045M) ÷ 3 = $748K × 4 = $2.99M

Weighted Average (more weight on recent years): (20% × $575K) + (30% × $625K) + (50% × $1.045M) = $835K × 4 = $3.34M

TTM EBITDA: $1.045M × 4 = $4.18M

That’s a $1.19M difference between the most conservative and most aggressive approaches—highlighting why understanding the drivers behind the growth is so critical to avoiding a costly mistake.

Use Deal Structure to Manage Risk

You may like the business—but that doesn’t mean you should pay for all the upside on day one. Many buyers use deal structure to balance risk and reward. Here are common tools:

Forgivable Seller Notes

If the business sustains 2024 EBITDA post-close, the seller gets paid. If not, you’re protected. This was the most frequently recommended approach in the Searchfunder discussion.

“Adds complexity but gives them the opportunity to earn what they think it’s worth and protects you if it doesn’t repeat.” — Dan Klawitter, Klaw Ventures

“I would strongly encourage you to also build in some protection for a purchase price adjustment if EBITDA goes way back down. I think the best tool to accomplish this is through a large, forgivable seller note.” — Michael Brophy, MI-BOX

Earnouts

Ties part of the purchase price to future performance. If 2025 and 2026 hit certain EBITDA targets, the seller gets additional payments.

“Can always offer an earnout to bridge the valuation gap. Let them prove it.” — Robbie Epstein, Searcher

Escrows or Holdbacks

Keep a portion of the payment aside until the business proves itself over time.

“If revenue or EBITDA dip back to pre-2024 levels, part of the seller note is forgiven. It’s the best way to pay them if it works out—and protect yourself if it doesn’t.” — Michael Brophy, MI-BOX

Tiered Pricing or Hybrid Multiples

Structure pricing as a blend of average EBITDA plus a premium if 2024 performance is confirmed.

“Use a 3-year average and add a 1–1.5x premium to account for growth. Helps the seller feel their success is valued without taking on all the risk.” — César Torras, Fox Capital

What Your Lender Thinks Matters

Even if you’re comfortable pricing off 2024 EBITDA, your lender might not be. SBA and conventional lenders typically prefer stability over optimism.

• Some will average EBITDA across 3 years.
• Others will discount a strong final year by 20-30%.
• Many will exclude “extraordinary” revenue items entirely.
• Most want to see several months of post-jump performance before accepting it as the new normal.

Lender Example: On our sample business with $1.045M in 2024 EBITDA, an SBA lender might calculate:

• Conservative lender: Three-year average of $748K
• Moderate lender: Two-year average of ($625K + $1.045M) ÷ 2 = $835K
• Progressive lender: TTM EBITDA of $1.045M, but with additional covenants

As one searcher in the discussion noted, “Not every bank will be comfortable with big EBITDA jumps.” Speaking with multiple lenders early in the process is crucial. Some banks specialize in certain industries and may be more comfortable with the volatility typical in businesses like HVAC. What you can get financed will ultimately limit what you can offer, so understanding lender perspectives should happen before—not after—you submit an LOI.

Deeper Due Diligence: Questions to Answer

Here’s a checklist of items to validate during due diligence:

• Was 2024 EBITDA driven by actual revenue growth or just cost control?
• How does Q1 2025 compare to Q1 2024? This is often the strongest validation of sustainability.
• What’s the customer concentration? Have you reviewed the top 10-20 customers year-over-year?
• Are margins improving, or are cost savings unsustainable (e.g., underpaying staff)?
• Are there supply chain considerations? For HVAC specifically, are parts sourced from China that could face tariffs or disruptions?
• Was the increase due to timing of expenses, like deferred bonuses or delayed repairs?
• Is there a difference between cash and accrual reporting that’s affecting the numbers?

If possible, ask for monthly P&Ls and job-level data to spot trends or anomalies. Break down revenue by service type, job size, and customer tenure. For HVAC businesses specifically, understand the ratio of new installations versus service contracts, as this affects revenue predictability.

“Did they gain sustainable market share? Add new geographies? Launch high-margin services? Validate that it’s structural.” — Aurelien Van Berten

Human Takeaway: Be a Skeptical Optimist

At the end of the day, business valuation is part art, part science. The goal is not to punish a seller for growing their business—but to ensure you don’t overpay for something that may not last.

If the jump in EBITDA is real, repeatable, and backed by data, a higher multiple may be fair. But if it’s unclear—or too good to be true—you need guardrails.

“When you buy a business, you’re buying a series of cash flows. Very recent jumps in cash flow require extra diligence.” — Jeff Greenspan, Financial Modeling Service

Remember too that there’s a natural tension in these negotiations. As Dave Gilbert notes, “Always red flags when you see EBITDA double the year they decide to sell.” The seller and their broker will almost certainly push for valuation based on the most recent performance, while your interest as a buyer is to ensure that performance is sustainable. This dynamic is normal—but understanding it helps you structure a deal that works for both parties while protecting your downside.

Final Thoughts

Volatile EBITDA doesn’t automatically mean you should walk away—but it does mean you should proceed with caution. Blend valuation methods, get granular in your diligence, talk to your lender, and use deal structure creatively to manage risk.

As Robert Samaan from Nomad Odyssey Capital noted in the discussion, “I think basing the valuation on the three-year average EBITDA and also having a forgivable seller note is going to look like overkill to the seller.” This highlights the balancing act required: being prudent without being so conservative that you lose the deal. The right approach depends on your risk tolerance, financing options, and the specifics of the business.