Same EBITDA, Different Price: Why Buyers Now Test Cash Conversion

Buyers of middle-market companies are still active, but they are sorting targets more carefully. GF Data reported that the average all-industry EBITDA multiple fell from 7.3x in the first quarter of 2026 to 7.0x in the second, on 85 transactions in each quarter. Transaction advisors at Bennett Thrasher say the dividing line is increasingly quality, and cash conversion sits near the top of the list.

What the numbers show

GF Data surveys private-equity-backed deals in the lower middle market, and its second-quarter figures, summarized in Mercer Capital's fall 2026 transaction update, show steady volume with a softer price. EBITDA (earnings before interest, taxes, depreciation, and amortization) is the profit measure most buyers use to set a price, and the average multiple of it paid for companies dropped by 0.3x. That is a small move on its own, and an average of many different businesses.

Averages hide the spread. Bennett Thrasher's Transaction Advisory Services group, which works on deals from $20 million to $250 million in enterprise value, wrote in September that buyers remain interested but are raising the bar. In its view, companies with repeatable revenue, high customer retention, durable margins, good cash conversion, and limited customer concentration draw the strongest interest. The firm's point is that a single multiple does not describe the market; it describes the midpoint between companies buyers want and companies they tolerate.

Why EBITDA is only a starting point

Cash conversion measures how much of a company's earnings becomes cash that an owner or lender can actually use. Two businesses can report the same EBITDA and convert very different amounts, because one needs to keep funding inventory, customer receivables, or equipment while the other does not. Bennett Thrasher makes this point directly: working capital and capital expenditure needs can make two companies with identical EBITDA look quite different on an economic basis.

Consider a hypothetical. Company A and Company B each report $5 million of EBITDA. Company A needs about $0.5 million a year for equipment and growth in receivables, so roughly $4.5 million is available as cash. Company B collects slowly, carries heavy inventory, and replaces machinery every few years, so it keeps only about $2.5 million. A buyer financing the purchase with debt, or planning to take cash out of the business, will value B well below A even though the income statements match. The multiple a seller hears is applied to EBITDA, but the buyer is thinking about the cash.

Lenders look at the same gap. A bank or private credit fund sizing acquisition debt cares about cash available to pay interest and principal, so a company that converts a smaller share of EBITDA supports less borrowing. Less debt capacity means the buyer must put in more of its own equity, and that usually pushes the price it can afford down. This is why a buyer's financing plan, and not only its view of the business, shapes the number a seller sees.

How buyers test it in diligence

In financial due diligence, the buyer's advisors typically run a quality of earnings analysis, which stress-tests reported profits to separate sustainable earnings from one-time items and accounting timing. Cash conversion work usually sits alongside it and looks at several things.

The first is net working capital, the money tied up in receivables and inventory net of what the company owes suppliers. Buyers set a target level of working capital to be delivered at closing, and a business whose needs swing with the season or with growth invites a negotiation over that target. The second is capital spending, where buyers separate maintenance (what it costs to keep the current business running) from growth spending, since only the first one reduces the cash a new owner can count on. The third is profitability by customer, product, service line, or location, which Bennett Thrasher notes buyers now examine to judge whether growth is sustainable rather than simply large.

What this means for a seller

Bennett Thrasher also observes that weak financial information creates uncertainty that can affect a deal's speed, structure, and value, and that sellers who resolve issues before going to market meet fewer surprises. This matches what owners often experience: a buyer who cannot reconcile the numbers will tend to protect itself through a lower price, a larger holdback, or a longer timeline.

Add-on acquisitions are one place where this plays in a seller's favor. The firm reports that smaller founder-owned businesses can be attractive to platform buyers for their location, customers, specialized staff, or capabilities. Those buyers still expect clean books, though, because they will fold the numbers into their own reporting quickly.