The EBITDA multiple is the most common valuation methodology used in mid-market mergers and acquisitions. It is calculated by dividing the enterprise value of a business — what a buyer pays for it — by the business’s EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization. If a business is purchased for $10 million and its EBITDA is $2 million, the transaction occurred at a 5x EBITDA multiple.
Why the Multiple Matters More Than EBITDA
Two businesses can have identical EBITDA and receive dramatically different offers. A business generating $2 million in EBITDA with high owner dependency, customer concentration risk, and undocumented processes might trade at 3x — a $6 million valuation. A business generating the same $2 million in EBITDA with recurring revenue, a strong management team, and documented systems might trade at 6x — a $12 million valuation. The $6 million difference in outcomes is entirely explained by factors that do not appear on the income statement.
What Determines the Multiple
The multiple is a direct expression of buyer-perceived risk. Lower perceived risk equals a higher multiple. The primary risk factors that compress multiples are owner dependency, customer concentration, undocumented processes, inconsistent financials, and declining revenue trends. The primary factors that expand multiples are recurring revenue, management depth, systems transferability, financial clarity, and a defensible market position.
Industry also matters. Businesses in sectors with high private equity activity, consolidation trends, or strong strategic buyer demand trade at higher multiples than businesses in fragmented or declining industries. Technology-enabled service businesses, healthcare services, and businesses with proprietary processes consistently attract premium multiples.
Seller’s Discretionary Earnings vs EBITDA
For smaller businesses — typically under $2 million in annual profit — buyers often use Seller’s Discretionary Earnings, or SDE, rather than EBITDA. SDE adds back the owner’s salary and benefits to EBITDA on the assumption that the buyer will replace the owner with their own management. For mid-market companies, EBITDA is the standard metric and typically does not include an add-back for the owner’s compensation unless it is significantly above or below market rate for the role.