A leading UK construction sector investor has warned that widespread reliance on EBITDA-based valuations is contributing to failed transactions and repriced deals across the market.
This comes as higher borrowing costs force buyers to focus on real profitability and real cash flow.
Bradley Lay, mergers and acquisitions specialist and co-founder of Peak Capital Group, said the gap between how sellers value their businesses and how buyers assess risk has widened significantly over the past 18 months.
Bradley Lay said: “EBITDA is still being used as the headline valuation metric in construction, but buyers are underwriting deals on net profit before tax and cash. That disconnect is now one of the most common reasons deals fall over.”
Mr Lay said EBITDA routinely strips out costs that directly affect a business’s ability to survive, particularly in capital-intensive sectors such as construction.
He added: “Tax, debt servicing, capital expenditure, asset replacement and working capital requirements are not optional. They are structural. Removing them may make a business look more attractive on paper, but it does not change economic reality.”
According to Mr Lay, EBITDA-based expectations are proving increasingly untenable as the cost of capital remains elevated and lenders tighten credit criteria.
He said: “With debt more expensive and less readily available, buyers cannot afford to rely on adjusted metrics. Acquisition debt has to be serviced from real earnings, not theoretical numbers.
“This is resulting in a growing number of late-stage valuation resets during due diligence, often after sellers have anchored emotionally to an initial headline price.
“Personal expenses, one-off add-backs and aggressive normalisations are routinely challenged or removed. When that happens late in a process, trust erodes and transactions stall.”
Mr Lay noted that scepticism toward EBITDA is well established among long-term investors, including Charlie Munger, who famously criticised the metric, and Warren Buffet who has repeatedly warned against relying on it as a measure of value.
He said: “In institutional investment, this debate was settled years ago. Sustainable profit and cash flow determine value. EBITDA does not.”
Lay said that when assessing acquisitions, he focuses on whether a business can operate without founder dependency, generate consistent net profit before tax, convert earnings into cash and reinvest capital at acceptable returns.
Mr Lay said: “One of the biggest mistakes sellers make is hiding behind EBITDA as if it tells the whole story. I looked at a piling and groundwork business that wanted £8 million based on four times EBITDA plus assets. On paper, they were showing £1.8 million EBITDA but once you accounted for depreciation, amortisation, and the debt servicing on all that heavy plant, the real net profit was only £500,000. That’s the number that actually matters.
“It was asset-heavy, had just £70,000 in cash, and was funded by more than ten different debt facilities. At £500,000 true profit, it would have taken me sixteen years just to break even. EBITDA might flatter the headline, but it doesn’t pay the bank or deliver returns.
He added: “Compare that to a cladding and façade business I reviewed making £1.5 million net profit before tax, with a sensible £4.5 million valuation. That’s a three-year break-even even if nothing improves and with the value I know I can add, even faster.
“EBITDA is a useful metric for some comparisons, but when you’re buying a business, especially an asset-heavy one, cash flow, real profit, and return on invested capital are what truly count.”
He warned construction business owners planning an exit that continuing to optimise for EBITDA presentation rather than underlying performance risks undermining outcomes.
He said: “Sellers who want credible offers need to focus on clean profit before tax, disciplined cash conversion and balance sheet resilience. Serious buyers are paying for durability and cash, not narrative.”