Valuing Distressed Businesses: Beyond the EBITDA Multiple

Zero times any multiple is still zero. I watched an experienced sponsor forget that in a distressed automotive aftermarket deal as the pandemic set in: reach for an EBITDA multiple out of pure habit, apply it to a business whose trailing earnings had gone negative, and conclude there was nothing left to recover. They were wrong. The capital that came back proved it.

The Multiple Is Fiction in Distress

The multiple is the language we all speak. It is how deals get priced, how sponsors underwrite, how value gets communicated in a single clean number. In a healthy business, it works fine. But in distress, trailing EBITDA is often negative or so distorted by one-time costs and a collapsing thesis that any multiple of it is a fiction. The problem is that the recovery decision (what a lender will accept, what a sponsor will fight for, what a buyer will pay) keeps getting anchored to that fiction. I have spent my career on the operating side of these situations, and the most important thing I can tell you is this: distressed valuation is not a multiple of what the business just lost. It is the sum of what can still be recovered, lever by lever.

A Wave of Automotive Distress, Misread

The automotive aftermarket has just lived through a wave of this. Over the past two years, name after name went into restructuring: a major parts maker whose first-lien debt fell from near par into the thirties in the weeks before it filed; a tire distributor filing for the second time in six years; wheel, brake, and accessory platforms following close behind. It is tempting to read that list (First Brands, ATD, Accuride, one wheel-and-accessory platform after another) as an industry in trouble. I read it differently. Not every name fits the pattern. The largest of them collapsed amid fraud allegations, which is a different failure. But in most of these cases the operating business was viable: the products sold, the customers stayed, the demand was real. What overwhelmed them was leverage, not operations. And when a viable business gets crushed by its capital structure, the recovery question is not “what multiple survives.” It is “what is actually here, and who needs it.” One express-wash operator is a useful tell: it filed in February 2025 and was back out by spring, recapitalized through a lender-led balance-sheet reset, because the underlying business (the revenue, the members, the car counts) was never the problem. The number on the trailing line was.

Why the Multiple Wins the Room

The multiple persists in these rooms for an understandable reason. It is fast, it is comparable, and it lets everyone around the table speak the same language without arguing about the business. That is exactly what makes it dangerous in distress. It substitutes a clean number for a hard look. And a clean number laid over a broken business gives you false precision and a low answer. The discipline distress actually demands is the opposite of fast, and it is expensive: the willingness to keep working a broken business for years to recover capital, with the easy write-off on the table the whole time.

The Four Levers of Distressed Recovery

So where does recovery come from in a restructuring? In my experience, four places, and almost never the income statement. First, the capital structure itself: what sits where in the priority stack, and what can be restructured or recut before anyone forces a sale. Second, the hard assets, and above all owned real estate, which holds value whether or not the business made money last year. Third, competitive dynamics: a business that two strategic players both need is worth something to one of them that no multiple of trailing earnings will ever capture. And fourth, a credible forward story: buyers pay for what a professionalized business will earn, not for the wreckage a broken thesis left behind.

The Sequence, Lived

I lived the whole sequence once. I led a commercial tire platform assembled as a roll-up on a clean thesis, its edge a rare retread authorization across two of the industry’s dominant brands. Then the larger franchisor reversed: renew, they said, only if we dropped the other brand, roughly half our business. When we refused, they went to war. They competed for our fleet customers, steered national accounts away, and blocked a signed acquisition that would have doubled the platform. Our commercial business fell double digits, into an operating loss. By the multiple logic, there was nothing left to recover.

There was a great deal to recover. We fought head-to-head for nearly three years. We held our ground, and burned a great deal of human capital, before reaching the hardest conclusion: the war was unwinnable and the roll-up was dead. The easy move was to write the investment off. We did the opposite; we ran the recovery ourselves. We professionalized a founder-built company, consolidated plants, and defended margin under constant attack. To protect supply from a franchisor who controlled it, I made a call that is anything but obvious in a crisis: we converted our flagship retread plant to a licensed brand, keeping it producing under a name customers trusted. We monetized owned real estate through a sale-leaseback that freed real capital. Then we ran a real process: hired a banker, built the book, sat through presentation after presentation, fielded a stack of offers, and played the two industry titans against one another. We sold on a forward basis, a restored run-rate of profitable months, though the trailing year was a loss, and returned the sponsor’s capital. Not one dollar of that recovery came from a multiple on a trailing number. It came from knowing which levers existed, and the order in which to pull them.

Stakeholder Recoveries

If you are a lender or a credit holder staring at a name where the trailing line says zero, the worst thing you can do is mark it to a multiple of that number and move on. Before you write capital down, inventory the levers: the real estate on the balance sheet, the strategic buyers who actually need the asset, the forward earnings a cleaned-up business can credibly support. The recovery is usually larger than the trailing line suggests, but only if someone surfaces it before the sale process sets the anchor.

And if you are a sponsor, here is the part you may not want to hear. The hardest call in a broken deal is not the sale. It is admitting the original plan is dead, and most make it a year or two too late. I will defend every month we spent fighting, but the clock on recovery does not start until you stop pretending, and every quarter of denial is recovery you hand to someone else. The forward-basis exit is legitimate, and often the highest-recovery path available, but it is earned, not asserted. A buyer pays for the pro-forma only when the business behind it has actually been repaired and professionalized.

Zero times a multiple is still zero, but rarely is value zero in a distressed business.

It is a stack of recoverable value that the trailing number hides. If you are holding a credit where the earnings line says there is nothing left and your gut says otherwise, that is the conversation worth having before the write-down, not after. That is the work we do.