Key Insight
The multiple is a conclusion, not an analysis. Two businesses in the same industry at the same multiple can be priced completely differently — one fairly and one catastrophically wrong.
How Multiples Work
Purchase price ÷ annual SDE (or EBITDA) = deal multiple.
A business with $400,000 SDE sold for $1,600,000 traded at a 4x multiple. The inverse: if you know the SDE and the appropriate market multiple, you can estimate value.
Multiples are quoted as a range ("3-5x SDE") for a given industry and business profile. Where within that range a specific deal lands depends on the risk and quality factors below.
What Drives Multiples Up
- Recurring revenue — monthly or annual contracts vs. transactional revenue
- Revenue growth — consistent 10-20%+ annual growth commands premium multiples
- Low customer concentration — revenue spread across many customers
- Low owner dependency — business runs without the owner's daily involvement
- Strong margins — higher EBITDA margins relative to industry peers
- Transferable assets — documented processes, strong management team, assignable contracts
- Scalable model — clear path to adding revenue without proportional cost increases
What Drives Multiples Down
- High owner dependency — see owner-operator dependency
- Customer concentration — single customer > 20% of revenue
- Declining revenue — even modest year-over-year declines compress multiples significantly
- Industry risk — businesses in disruption-prone industries (print, certain retail) trade at discounts
- Operational fragility — key employee risk, equipment risk, single-location risk
- Financing limitations — businesses that aren't SBA-eligible often trade at lower multiples because the buyer pool is smaller
The Multiple Expansion Play
One of the core value creation strategies in acquisition entrepreneurship is multiple arbitrage: buying a small business at a small-company multiple (3-4x SDE), growing it to a scale where it's valued on EBITDA (7-9x), and selling at that higher multiple. The underlying business may not have grown dramatically — but the change in valuation methodology alone creates significant value.
Buy: $450K SDE at 3.5x = $1.575M purchase price. Three years later, EBITDA (after paying market management) is $800K. The business now trades at 7x EBITDA = $5.6M. The multiple expansion — not just the earnings growth — is responsible for the majority of the return.
Why the Multiple Alone Tells You Nothing
A 4x multiple on clean, recurring, low-concentration revenue is a very different deal from a 4x multiple on lumpy, concentrated, owner-dependent revenue. Treating all 4x deals as equivalent is the most common pricing error in SMB acquisitions.
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