Is 3-5x EBITDA a 'typical' valuation for a small business?

searcher profile

November 29, 2023

by a searcher from Universität Mannheim in Hamburg, Deutschland

In the 'HBR Guide to Buying a Small Business', Ruback and Yudkoff suggest businesses with $0.8-2.0M EBITDA often sell for 3-5x EBITDA.

I'm curious:

  1. Is this 3-5x multiple realistic, especially in the German market?
  2. For smaller businesses ($0.4-0.8M EBITDA), what's a typical EBITDA multiple?

    Keen to hear your thoughts and experiences!

Thanks!

7
34
625
Replies
34
commentor profile
Reply by a searcher
from Gonzaga University in Denver, CO, USA
As others have said, it is highly dependant on a number of factors in the micro end of the market. In more asset intensive businesses (we invest in transport and logistics), most companies under ~$3m of EBITDA trade for the value of their assets plus a small premium for the going concern business.

Any asset value you can ascribe to the purchase price will also help you with funding as it provides collateral for lenders. Asset value is more than just physical equipment, look for patents, proprietary software, etc. You would be amazed what a motivated lender will call an "asset" to get money deployed in a deal they like.
commentor profile
Reply by a searcher
from Oklahoma State University in Tulsa, OK, USA
In my experience it depends on industry primarily, then other factors play a role as well. Such as Sales & Profit Trend, Concentration Risks in the Business etc...

So for example, going back decades typically a manufacturing business would go for 4 to 5 times EBITDA
Wholesale/Distribution is around 4 to 4.5 times EBITDA
Retail is around 3 to 4 times EBITDA
Service Businesses are around 2 to 3 times EBITDA
This is roughly true of even larger sized businesses, up to around $3 Million per year in EBITDA.

Something to keep in mind, and I think it is rarely talked about. What is also interesting for acquisitions that have the highest chance of success, regardless of the multiple used to set price, the terms are always structured in such a way that the buyer keeps around half the pre-acquisition EBITDA. So if before the acquisition the business produced $1 Million in EBITDA per year, the buyer will keep about $500K per year after everyone is paid, debt service, investors, seller financing etc.... Much less than that the risk starts to rise very fast, so its a sign something isn't priced right or the terms aren't right.

So regardless if you pay 2 times EBITDA or 5 times EBITDA, you have to figure out a financing structure that allows you to retain around 50% of the Pre-Acquisition EBITDA or you don't do the deal.
commentor profile
+32 more replies.
Join the discussion