Valuation multiples come in myriad types. Here are some of the most commonly used ones when it comes to SMB acquisitions.

Seller’s discretionary earnings (SDE) multiple

SDE represents the total owner’s financial benefit, including their salary, bonuses, and other personal expenses paid for by the business.

It is most often used in smaller transactions, as EBITDA—or adjusted EBITDA—becomes a more reliable measure of a company’s value as the company grows.

The SDE multiple used depends on the size of the business. For instance, a business with SDE of $350,000 to $500,000 could use a multiple of 2x to 3x. A business with SDE in the $1,000,000 range may use a 4x+ multiple.

Adjusted EBITDA multiple

SDE and adjusted EBITDA are nearly identical valuation multiple types—both measuring the cash flow of a business. That said, adj. EBITDA typically includes negative add-backs and does not add-back the owner’s entire salary, just the difference between their salary and that of a replacement.

Let’s say you purchase a smaller business, and the Head of Sales decides to exit with the previous owner. In SDE, you would adjust for the cost of replacing the Head of Sales but not the owner. In adj. EBITDA, you would adjust for the cost of replacing the Head of Sales as well as the salary required to attract a manager to take on the owner’s responsibilities.

Discretionary expenses or owner perks are also considered adjustments. Below is an example Adj. EBITDA calculation.

Item	Amount ($)
Revenue	1,000,000
Cost of Goods Sold (COGS)	-600,000
Gross Profit	400,000
Operating Expenses
- Selling Expenses	-100,000
- General & Administrative	-80,000
- Research & Development	-50,000
EBITDA	170,000
Adjustments:
- Non-recurring Expenses	20,000
- Stock-based Compensation	15,000
- Depreciation & Amortization	30,000
- Owner's Salary Adjustment	40,000
- Lease Exit Costs	10,000
- One-time Legal Fees	5,000
- Unrealized Gains/Losses	-3,000
Adjusted EBITDA	307,000

Adj EBITDA multiples may range anywhere from 4x to 6x depending on the cash flow and industry of the business.

EBITDA multiple

Earnings before interest, taxes, depreciation, and amortization (EBITDA) is arguably the most common valuation multiple used in M&A. It is a reliable, non-GAAP measurement of a business’s cash flow or ROI that normalizes differences and may provide a more accurate projection of future cash flows. In other words, EBITDA is a proxy for cash flow.

Among SMB purchases, EBITDA multiples range greatly depending on the size of the business and other factors—such as the ones discussed above. According to Pepperdine’s Capital Private Markets Report for 2024, the average EBITDA multiple across all industries and business size was 6.9x. Businesses with an EBITDA of $1 million averaged a multiple of 5.3x, whereas $100 million EBITDA businesses commanded an average multiple of 10x.

Revenue multiple

Though revenue multiples are sometimes used, they tend to be very uncommon in the SMB world. This is largely due to revenue not accounting for costs, unlike EBITDA or SDE metrics. Businesses that are highly specialized (e.g. SaaS) or in “high-growth” mode may more frequently use revenue multiples.

Part of the reason for the lack of revenue multiple used in SMB transactions is due its lack of applicability. SMBs likely won’t have investor backing or be extremely high growth spurts. Revenue multiples are better used for companies with those characteristics as profitability isn’t as much a priority in the short-term, necessarily.

Revenue multiples in the SMB world are relatively small compared to EBITDA multiples: average revenue multiples range between 0.5x and 2x.

404

This page could not be found.