Understanding Valuation Multiples: Why Your Business is Unique and What Factors Influence the Range

Initial conversations with sellers almost always include a variant of, "In my industry the multiple is x." That's usually a gross oversimplification: Multiples (and their implied valuations) are best thought of as ranges - sometimes large ones, and the key is to locate the seller's business within that range.

For example, middle market targets tend to sell at 4-11x adjusted EBITDA. That's a huge range, but, then again, there's a huge range of middle market companies.

So, what goes into the range? Risk and de-risking factors:

▶ Size
▶Growth
▶Profitability
▶Reliable cash flow
▶Market position
▶Confidence in historical financials
▶Confidence in projections
▶Capital requirements (including for CapEx)
▶Industry factors
▶Management (including bonuses and non-competes)
▶Key-person issues
▶Related-party issues (leases and contract counterparties)
▶Customer diversification (or concentration)
▶Supplier diversification (or concentration)
▶Product / service diversification (or concentration)

There are too many factors to count, but the bottom line is that every company's multiple is unique because its circumstances are unique.