How is a business valued?
Business valuation is part science, part market. The most common methodology for lower-middle-market businesses is an EBITDA multiple — your earnings before interest, tax, depreciation, and amortisation, multiplied by a number derived from comparable transactions in your sector and size range.
A business generating $1M EBITDA in a sector trading at 5× is worth approximately $5M. That same business with the same earnings in a higher-demand sector, or with stronger recurring revenue, might trade at 7× or 8×.
The multiple is not fixed — it's negotiated, and it's influenced by how well your business is positioned, how competitive your sale process is, and whether you're talking to the right buyers.
EBITDA multiples by sector
These are indicative ranges for lower-middle-market transactions. Actual multiples vary based on business quality, size, and market conditions at the time of sale.
Other valuation methods
Revenue multiples
Used when EBITDA is low or negative — common for early-stage SaaS, high-growth businesses, or companies where earnings are being reinvested heavily. Revenue multiples typically range from 0.5× to 5× depending on growth rate, gross margin, and sector.
Asset-based valuation
Relevant for asset-heavy businesses — property, equipment, or inventory-driven companies — where the value of the underlying assets exceeds what a multiple of earnings would suggest. More common in sectors like agriculture, manufacturing, and real estate.
Discounted cash flow (DCF)
Projects future cash flows and discounts them back to a present value. Used primarily by larger buyers doing rigorous financial modelling. The result is only as reliable as the assumptions going in — which is why market-based comparables (EBITDA multiples) remain the dominant approach in the lower middle market.
What drives your valuation up — or down?
Recurring revenue
Contracted, subscription, or repeat revenue commands a significant premium over transactional revenue. Buyers pay more for predictability.
Management independence
A business that runs without you is worth substantially more than one where you're the key person. Buyers are acquiring a system, not a job.
Revenue diversification
No single customer representing more than 15–20% of revenue. Customer concentration is a valuation discount — and sometimes a deal-breaker for institutional buyers.
Clear growth pathway
Buyers pay for what the business could be, not just what it is. A defensible plan for organic or geographic growth — even if you haven't executed it yet — increases perceived value.
Owner dependence
If the business revolves around you — key relationships, technical knowledge, sales — buyers price in the transition risk. This is one of the most common value destroyers.
Messy or restated financials
Inconsistencies in your books — unexplained movements, unclear addbacks, undeclared income — create doubt. Doubt kills deals or drives price down.
Declining revenue trend
Buyers buy momentum. A business declining even modestly will face hard questions about the floor — and buyers will price in the uncertainty.
How to maximise your valuation before you sell
The best time to start preparing your business for sale is 12–24 months before you intend to go to market. In that window, there are meaningful steps you can take to improve your multiple:
- Clean up your financials and eliminate addbacks where possible
- Reduce customer concentration by developing new accounts
- Formalise recurring revenue — move contracts from handshake to written
- Build or strengthen your management team so the business runs without you
- Document processes and systems — buyers pay for scalability
- Address any outstanding legal, tax, or compliance issues before they surface in due diligence