Business Valuation Explained: How Your Business Value Is Calculated
Business owners often have a number in their head for what their company is worth. Buyers have a different number. The gap between those two figures is usually explained by a few specific things. Here's how valuation actually works.
Key Takeaways
- ✓EBITDA multiples are the primary valuation method for most lower-middle-market deals
- ✓Multiple ranges vary significantly by industry, growth rate, and revenue quality
- ✓Strategic buyers often pay more than financial buyers because of synergies
- ✓Valuation is ultimately determined by what buyers will pay — not by formulas
In this guide
1The EBITDA multiple method (most common)
For businesses with $1M+ in EBITDA, the dominant valuation method is:
Enterprise Value = Adjusted EBITDA × Multiple
Adjusted EBITDA starts with net income and adds back interest, taxes, depreciation, amortization, and owner-specific items (above-market salary, personal expenses, one-time costs).
The multiple is determined by comparable transactions in your industry, your specific business characteristics, and current market conditions. Lower-middle-market multiples typically range 3x to 8x, with most deals clearing in the 4x-6x range. That range is wider than people expect — the specifics matter.
2Revenue multiples (for high-growth businesses)
For businesses with strong revenue growth but limited profitability — common in SaaS or early-stage technology companies — revenue multiples are sometimes used instead of or alongside EBITDA multiples.
Revenue multiples vary widely by growth rate, churn, and margin profile. A SaaS business growing 40% per year with 80% gross margins might trade at 3-5x ARR. A services business with the same revenue but 30% margins and flat growth would trade at a fraction of that.
3What moves your multiple up or down
Growth rate. A business growing 20% per year commands a premium over one growing at 5%.
Revenue quality. Recurring, contracted revenue is worth more than transactional.
Customer concentration. High concentration compresses multiples.
Management depth. Key-person dependency is a discount factor.
Industry. Technology and healthcare services trade higher than construction or retail.
Market conditions. When private equity has capital to deploy, multiples go up. In tighter credit environments, multiples compress.
The delta between a 4x and 6x multiple on $2M EBITDA is $4M in enterprise value. This is why working with an advisor to improve your readiness score before launching a process has substantial financial impact.
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