Business Valuation Multiples, Explained

What valuation multiples are

A valuation multiple expresses a business's price as a multiple of a financial figure, usually earnings or revenue. If a business with a given level of earnings sells for three times that figure, the multiple is 3x.

Multiples are popular because they are quick and easy to compare. They are also easy to misuse, because a multiple only means something when you know exactly what figure it is applied to, which year, which adjustments and what was included in the price.

The main multiples and when each is used

Why SDE and EBITDA multiples differ

SDE adds back one owner's full compensation, while EBITDA treats a market salary for management as a cost. For the same business, SDE is therefore a larger number than EBITDA, and the SDE multiple is usually lower than the EBITDA multiple for a comparable value. Comparing an SDE multiple from one deal with an EBITDA multiple from another is one of the most common valuation mistakes.

To compare them, convert first. Take SDE, subtract a realistic market salary for the role the owner performs, and you have an approximation of EBITDA. Apply the value you calculated to each figure to see the implied multiple on both bases.

What moves a multiple

The same earnings can be worth very different amounts. Factors that usually push a multiple up:

• Recurring or contracted revenue
• Diversified customers with no single dominant account
• Consistent growth over several years
• Strong margins compared with similar businesses
• A management team or documented processes that let the business run without the owner
• Clean, verifiable financial records
• A growing market and defensible position

Factors that usually push a multiple down:

• Heavy reliance on the owner's relationships or skills
• Customer, supplier or channel concentration
• Declining or volatile earnings
• Deferred capital expenditure or ageing equipment
• Legal, regulatory or reputational issues
• Messy or unverifiable records

The business valuation calculator lets you see how some of these factors change an indicative value.

How to build a reference range you can trust

We do not publish a table of "typical" multiples. Ranges quoted without a source, a date, a deal count and an earnings definition are more likely to mislead than help, and the inputs behind them change with interest rates and buyer demand. Instead, build your own reference range for the business in front of you:

1. Fix the earnings base first. Decide whether you are working with SDE or EBITDA, for which 12-month period, and after which add-backs. A multiple is meaningless until the figure it applies to is defined.
2. Collect comparable closed deals, not asking prices. Ask brokers, lenders, appraisers and advisors for closed transactions in the same industry and size band. Asking prices tell you what sellers hope for, not what buyers paid.
3. Record the context for every data point: the date, the earnings base, the size of the business, whether working capital and inventory were included, and how much of the price was paid at closing versus through a seller note or earnout.
4. Use a range, not an average. With a small number of comparables, the spread is more informative than the midpoint. Note how many deals sit behind each range.
5. Adjust for the factors above. Place the business within the range based on growth, concentration, owner dependence, record quality and transferability, and write down why.
6. Cross-check with a second method. Test the result against what the business can finance and what it would cost to build, using the business valuation guide and the deal analyzer.

If you see a multiple quoted elsewhere, ask where it came from, how many deals it reflects, what earnings definition was used and when the deals happened. For a formal opinion of value, for example for lending, tax or legal purposes, use a qualified, credentialed appraiser.

Multiples and deal terms

A headline multiple can hide a lot. Two deals at the same multiple can be very different if one is paid fully in cash at closing and the other includes a large seller note and an earnout that depends on future results. When you compare multiples, compare how much is paid at closing, how much is deferred and how much is contingent.

The structure also affects the buyer's ability to pay. The deal analyzer shows how a price at a given multiple translates into debt service and whether the business can carry it.

Converting between multiples

Converting helps you sanity-check a price quoted on an unfamiliar basis:

1. Revenue multiple to profit multiple: divide the revenue multiple by the profit margin. A business priced at a revenue multiple with a modest margin implies a much higher profit multiple.
2. SDE multiple to EBITDA multiple: calculate the value, subtract a market salary from SDE to estimate EBITDA, and divide the value by that figure.
3. Multiple to payback period: a profit multiple is roughly the number of years of current profit, before tax and financing costs, it would take to recover the price if earnings stayed flat.

Common traps

• Applying a multiple to the best year rather than sustainable earnings
• Mixing SDE and EBITDA multiples
• Using multiples from much larger businesses, which usually command higher multiples
• Ignoring working capital and capital expenditure
• Treating an asking price as a sale price
• Forgetting that the deal structure is part of the price

Using this explainer

You are welcome to link to this page when explaining valuation multiples to clients, partners or readers. If we add market ranges in future, each one will show its source, date and deal count.