Most small businesses (under $5M EBITDA) sell for 3-6x adjusted EBITDA, with the multiple driven by industry, growth rate, customer concentration, recurring revenue percentage, and management depth. Lower-middle market businesses ($5M-$50M EBITDA) typically sell for 6-10x. Asset-heavy businesses (manufacturing, distribution) often add asset value to a lower multiple; service businesses are valued almost entirely on EBITDA.
There are three formal valuation approaches, but for most small business sales, the income approach (multiple of EBITDA or seller's discretionary earnings) dominates. The market approach (comparable transactions) is the second most useful, what have similar companies sold for recently? The asset approach is generally a floor, not a ceiling, except for asset-heavy businesses where physical assets can exceed earnings-based valuations.
The single biggest valuation driver is recurring vs project revenue. A business with 80% recurring revenue from contracts that auto-renew typically commands a 6-10x multiple; the same EBITDA in a project-based business that has to win every job from scratch commands 3-5x. SaaS, managed services, subscription, and service contract revenue all command premium multiples vs transactional or project revenue.
Customer concentration is a major value killer. A business where one customer represents more than 25% of revenue trades at a meaningful discount, buyers fear the customer leaving post-acquisition. Diversified customer bases (no customer over 10-15%) command full multiples. Documented contracts with auto-renewal terms are worth more than handshake relationships even at the same revenue level.
Management depth matters more than most owners realize. A business that runs without the owner, where the owner is a strategic leader, not the primary salesperson, project manager, or technical expert, is significantly more valuable than the same financials with an indispensable owner. Buyers underwriting a deal want to know they're buying an enterprise, not a job. Owners planning to sell in 3-5 years should spend that runway building a management team that can operate without them.
Key facts
- Small business multiples: typically 3-6x adjusted EBITDA
- Lower-middle market multiples: typically 6-10x EBITDA
- Recurring revenue businesses: command 1.5-2x premium over project businesses at same EBITDA
- Customer concentration over 25% in a single customer: significant valuation discount
- Owner-dependent business (owner is primary rainmaker or operator): 20-40% discount vs comparable
- Industry comparables: SaaS 6-15x, managed services 5-10x, distribution 3-5x, manufacturing 4-7x, professional services 3-6x
What is 'adjusted EBITDA' and why does it matter?
Adjusted EBITDA starts with reported EBITDA (earnings before interest, taxes, depreciation, and amortization) and adds back non-recurring or owner-specific expenses that wouldn't exist under new ownership: above-market owner compensation, family members on payroll not contributing, personal expenses run through the company, one-time legal or consulting fees, and rent paid to a related party at above-market rates. Adjusted EBITDA is what a sophisticated buyer will use to value the company, and it can be 20-40% higher than reported EBITDA for owner-operated businesses. Getting this calculation right (and being able to defend it in due diligence) is critical to maximizing sale price.
Should I get a formal business valuation before selling?
Yes, but understand its limits. A formal valuation gives you a defensible starting point, helps with estate planning, and creates documentation if part of the sale involves tax-sensitive structures (gifts to family, ESOP, charitable trusts). However, the valuation a buyer will pay is determined by the market and the deal process, not by an appraiser's report. The most valuable role of a pre-sale valuation is identifying the gaps between current value and your goal value, and giving you 12-24 months to close those gaps before going to market.
