Valuation FundamentalsWindsor DrakeUpdated October 22, 2026
By Jeff Barrington, Managing Director
Short answer
An exit multiple is the price paid for a business, measured as enterprise value, divided by an earnings figure, usually adjusted EBITDA. A company bought for $30 million with $5 million of adjusted EBITDA sold at 6.0x. Profitable companies of meaningful scale typically sell at 4.0x to 8.0x EBITDA, and owner-operated businesses at 2.0x to 4.0x SDE. Growth, recurring revenue, customer concentration, size and the sale process move a company within its range.
The Formula
Enterprise value is the product of the earnings base and the multiple applied to it:
Enterprise Value = Adjusted EBITDA × Exit Multiple
A company with $3 million in adjusted EBITDA that sells at a 5.5x multiple has an enterprise value of $16.5 million. A company with the same EBITDA that commands a 7.0x multiple is worth $21 million. That $4.5 million difference is not random, it is the cumulative result of the factors below. A single point of multiple on $3M of EBITDA is $3 million of additional transaction value.
The Three Exit Multiples
EV / EBITDA
The standard for profitable, cash-flow-positive businesses. Typical range 4.0x to 8.0x for companies of meaningful scale.
EV / Revenue
Used for high-growth companies where current earnings are not yet the story, especially software and SaaS companies. Private software runs 2.0x to 6.0x, with premium assets exceeding 7.0x.
SDE multiple
Seller’s discretionary earnings, for owner-operated businesses below the institutional threshold. Typically 2.0x to 4.0x; companies transition to EBITDA-based multiples beyond $1M to $2M in EBITDA.
Private Equity
The entry multiple is what a buyer pays at acquisition; the exit multiple is what it expects to receive when it sells. Private equity returns come from three sources: earnings growth during the hold, debt paid down from cash flow, and multiple expansion, which means selling at a higher multiple than the one paid. A fund that buys at 5.5x and sells at 7.0x on the same $3 million of EBITDA turns $16.5 million into $21 million with no earnings growth at all.
Sponsors usually underwrite a deal assuming no multiple expansion, so the price a sponsor can pay a founder depends on the growth and debt paydown it expects. That is why two sponsors can value the same company differently, and why competition between buyers matters more than any single bid.
Method
EV/EBITDA is the standard for private companies. EV/EBIT deducts depreciation and amortization first, which matters for asset-heavy businesses that have to keep replacing equipment. Price to earnings (P/E) values equity after interest and tax and is used mainly for public companies. Revenue multiples apply when earnings are small or negative, typically for growing software companies.
Good comparables match the company on sector, size, growth, margins and business model, and the transactions should be recent. A multiple paid in a different interest rate environment, or by a buyer with a different strategy, can mislead in either direction.
What Moves the Number
01
Companies growing at 20%+ annually command higher multiples, and the quality of that growth matters more than the rate alone.
02
Businesses with 70%+ recurring revenue trade meaningfully higher, because predictable revenue is easier for buyers to underwrite and finance.
03
Concentration is the fastest way to depress a multiple. Expect a discount if a single customer exceeds 15% of revenue, or the top five exceed 40%.
04
A business that cannot run without the owner carries transition risk. A genuine management layer protects the multiple.
05
Margins above 20% signal pricing power and are fundamentally stronger than 10 to 12%. Software margins can exceed 30 to 40%.
06
The sector sets the baseline range; the rest of these factors move you within it.
07
The size premium is real. The jump from sub-$3M to $5M+ EBITDA is the most consequential threshold a seller can cross.
08
A structured, competitive process is the most effective step available to a seller, routinely worth 15 to 30% in additional value.
Buyers value adjusted EBITDA, not reported earnings. Add-backs, such as above-market owner compensation (a market CEO or general-manager rate is typically $150,000 to $300,000 in the lower middle market), must be documented and defensible. A sell-side quality-of-earnings report carries far more weight than seller-prepared schedules.
By Industry
These are benchmarks, not ceilings. The final multiple is company-specific, not industry-specific, the ranges below set the starting point.
| Software / SaaS | 8.0x to 15.0x+ EBITDA (or 2.0x to 6.0x+ ARR) |
| Technology-enabled / IT services | 6.0x to 10.0x |
| Healthcare services | 7.0x to 12.0x |
| Business services (staffing, consulting, marketing) | 4.0x to 7.0x |
| Financial services (fintech at the high end) | 5.0x to 9.0x |
| Manufacturing (precision / aerospace at a premium) | 4.0x to 7.0x |
| Construction & engineering | 3.0x to 5.0x |
The Size Premium
Larger businesses carry lower risk, attract a broader buyer pool, and secure better financing. Growing EBITDA before a sale compounds value through both higher earnings and a higher multiple, moving from $2M to $5M in EBITDA can lift enterprise value by 3.0x to 3.5x, not just 2.5x.
| $1M to $2M EBITDA | Individual buyers, search funds, SBA loans (~$5M ceiling) | 3.5x to 5.0x |
| $3M to $5M EBITDA | Institutional PE and family offices engage | 5.0x to 7.0x |
| $5M to $10M EBITDA | Full institutional buyer universe | 6.0x to 8.0x+ |
| $10M+ EBITDA | Large PE and strategic acquirers | 8.0x to 12.0x+ |
FAQ
There is no universal answer; it is context-dependent. For most lower-middle-market businesses with $5M to $300M in enterprise value, the core range is 4.0x to 8.0x. A 5.0x multiple is strong for a $1.5M construction company but below market for a $5M SaaS business.
Reported EBITDA is net income plus interest, taxes, depreciation, and amortization. Adjusted EBITDA applies defensible add-backs to reflect true profitability under new ownership. A sell-side quality-of-earnings report carries far more weight with buyers than seller-prepared schedules.
Recurring contractual revenue, gross margins of 70 to 85%, strong retention, low capital intensity, and scalability all reduce risk and widen the buyer pool, which supports higher multiples on both revenue and EBITDA.
Yes. Over a 12 to 24 month preparation window you can reduce customer concentration, raise the recurring-revenue share, build a management layer, improve reporting, and obtain a quality-of-earnings report, each of which moves the multiple.
Enterprise value is the price for the whole business. Equity value is what the owner receives: Equity Value = Enterprise Value − Debt + Cash. A $20M enterprise value with $3M of debt and $500K of excess cash produces $17.5M of equity value. Multiples produce enterprise value, not equity value.
It is the single most effective lever. A structured, competitive process routinely adds 15 to 30% in transaction value, along with cleaner deal structures and less re-trade risk.
When current profitability understates value, typically high-growth or reinvestment-heavy companies, including SaaS and early-stage or below-scale businesses where earnings are not yet the right lens.
Macro conditions, PE dry powder, interest rates, and credit availability, set the environment, but company-specific factors remain primary. Quality assets command premiums even in weaker markets.
Divide enterprise value by the earnings figure the buyer priced on, usually adjusted EBITDA. A company bought for $30 million with $5 million of adjusted EBITDA sold at 6.0x. To work forward, multiply: $3 million of adjusted EBITDA at 5.5x gives $16.5 million of enterprise value. Use enterprise value, so that debt and cash do not distort the ratio.
It is one of two ways to set terminal value in a discounted cash flow model. The analyst applies a multiple, usually EV/EBITDA taken from comparable companies or transactions, to EBITDA in the final forecast year, then discounts that terminal value back to today along with the forecast cash flows. At 6.0x, year-five EBITDA of $5 million gives a $30 million terminal value. The other way is the perpetuity growth method.
The entry multiple is what a buyer pays when it acquires a company. The exit multiple is what it receives when it sells. A private equity fund that buys at 5.5x and sells at 7.0x on the same $3 million of EBITDA turns $16.5 million into $21 million with no earnings growth. That gain is called multiple expansion, and it is one source of private equity returns.
For business services such as staffing, consulting and marketing, this guide’s indicative range is 4.0x to 7.0x EBITDA in the lower middle market. Private equity buyouts price higher. GF Data reported business services at 7.5x trailing adjusted EBITDA in H1 2026, across deals of $10 million to $500 million. Recurring contracts and low client concentration move a firm toward the top of its range.
GF Data reported an average of 7.0x trailing adjusted EBITDA across 85 private equity deals in Q2 2026, down from 7.3x in Q1, and 7.1x across 170 deals in H1 2026. Those deals range from $10 million to $500 million of enterprise value. Smaller businesses sell for less. BizBuySell reported 3.73x cash flow for businesses selling above $1 million in Q3 2026. See EBITDA multiples by industry for 25 sector ranges.
Strategic buyers can often pay more because they price in cost savings and revenue they can add, while financial buyers price the company on its standalone earnings and their return targets. In practice the highest bid can come from either side: a sponsor buying an add-on for an existing platform can pay a strategic-level price.
Windsor Drake advises founder-led companies on sell-side M&A. A first conversation is confidential and starts with your numbers.
General information, not legal, tax or investment advice. Every transaction turns on its own facts and documents. Windsor Drake is not a registered broker-dealer and does not offer, sell or place securities. When a transaction requires a registered broker-dealer, that work is handled by a registered broker-dealer partner.
