Multiple

The multiple is not arbitrary and it is not one industry number. It comes from what comparable businesses actually sold for, adjusted for this business: size, growth, customer concentration, how dependent it is on the owner, recurring versus one-time revenue, and the quality of its records. WHICH earnings figure the multiple applies to matters as much as the multiple itself, and the four you will see are not interchangeable. A multiple of SDE is the norm for owner-operated businesses, because SDE is what is available to one working owner. A multiple of EBITDA is the norm once a business runs on hired management, because EBITDA is what is left after paying that management. The SDE multiple is always the lower number of the two for the same business, and the two routes should land in a similar place. If they do not, something is wrong with the inputs. A multiple of gross profit shows up where cost of sales is largely pass-through, in staffing, distribution and some agency models. Revenue there overstates how big the business really is, so gross profit is the honest measure of scale. A multiple of revenue is the crudest, and it is used when earnings are unreliable, negative, or not yet meaningful. It ignores whether the business makes money at all, so treat a revenue multiple as a market convention rather than a valuation.

• Adjusted EBITDA
• Capitalization of historical earnings
• Customer concentration
• Discounted cash flow (DCF)
• EBITDA
• Seller's Discretionary Earnings (SDE)

• 6 Rules of Thumb for Business Valuation
• Beware the Benchmark Valuation
• EBITDA and SDE and Multiple Explained
• Extraordinary multiples – fact or fiction?