Valuation
Valuation Multiple
A ratio — like 4× EBITDA or 1.2× revenue — used to translate a business's earnings into an estimated value based on what comparable businesses sell for.
Multiples are the market approach to valuation: if similar businesses trade at 4–5× EBITDA, yours is probably worth something in that range times your (adjusted) EBITDA. The multiple compresses everything the market believes about risk, growth, and quality into a single number.
Which multiple applies depends on the business. EBITDA multiples dominate for profitable SMBs; revenue multiples appear where profits are reinvested away (SaaS); SDE (seller's discretionary earnings) multiples rule for owner-operated main-street businesses under roughly $1M of earnings. Small companies command far lower multiples than public ones — the 'small company discount' reflects concentration, key-person risk, and illiquidity.
Both halves of the equation get negotiated: buyers attack the earnings figure (challenging add-backs to adjusted EBITDA) and the multiple (citing customer concentration, owner dependence, declining trends). Improving the durable characteristics of the business moves the multiple more than any spreadsheet argument.
Common pitfalls
- Applying a public-company or headline multiple to a small private business — size, liquidity, and risk differences make it wildly wrong
- Confusing enterprise-value multiples with equity value — the debt on the business comes out of the seller's proceeds
- Anchoring on the multiple a friend's business supposedly sold for — undisclosed terms (earnouts, seller notes, working capital) hide inside quoted multiples
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