Valuation Frameworks for Lower Mid-Market Acquisitions

Lower mid-market valuation is equal parts art and science. The financial statements are unreliable. The comparables are scarce. The owner's expectations are shaped by what their golf buddy got for a completely different business. Here is how experienced acquirers actually think about value.

Start with Adjusted EBITDA

The reported financials of a founder-owned business are almost never the real financials. Every valuation starts with normalization:

Common Add-Backs:

• Owner compensation above market rate (owner paying themselves $500K when the role is worth $200K)
• Family members on payroll who do not contribute to operations
• Personal expenses run through the business (vehicles, travel, insurance, country club dues)
• One-time expenses (lawsuit settlement, facility move, equipment replacement)
• Below-market rent (owner owns the building and charges the business below-market rates)

Common Subtractions:

• Above-market rent (owner charges the business above-market rates for owned real estate)
• Deferred maintenance or capital expenditures
• Below-market compensation for key employees (underpaid managers who will demand raises post-acquisition)
• Revenue concentration risk adjustments

The adjusted EBITDA number is the foundation of every conversation about price.

Multiple Selection

Lower mid-market multiples vary significantly based on:

• Industry: Asset-light services businesses (4-6x) versus recurring revenue businesses (6-8x) versus technology-enabled services (7-10x)
• Size: Larger businesses command higher multiples. A $1M EBITDA business trades at 3-5x. A $5M EBITDA business trades at 5-7x.
• Growth: Declining revenue depresses multiples. Consistent 10%+ growth commands a premium.
• Recurring revenue: Businesses with contractual or subscription revenue receive a meaningful premium over project-based or one-time revenue models.
• Customer concentration: A business where one customer represents 30%+ of revenue is worth less than a well-diversified business at the same EBITDA level.
• Owner dependence: If the business cannot function without the current owner, the multiple compresses significantly.

The Frameworks

1. Comparable Transaction Analysis. Look at recent transactions in the same industry and size range. Sources include PitchBook, DealStats, and industry-specific M&A advisors. Challenge: data for sub-$10M deals is sparse and often unreliable.

2. Discounted Cash Flow. Project future cash flows and discount to present value. Works well for businesses with stable, predictable cash flows. Less useful for businesses with significant variability or growth potential.

3. Replacement Cost. What would it cost to build this business from scratch? Useful for asset-heavy businesses and businesses with significant competitive moats (licenses, certifications, customer relationships).

4. Rule of Thumb. Many industries have widely accepted valuation shortcuts: dental practices at 60-80% of revenue, HVAC companies at 3-5x EBITDA, SaaS at 5-10x ARR. Useful as sanity checks, dangerous as primary methodologies.

The Negotiation Reality

Valuation is not just an analytical exercise. It is a negotiation tool. The seller has a number in their head. Your job is to understand where that number came from and bridge the gap with structure:

• Seller financing effectively reduces the present-value purchase price
• Earn-outs shift risk to the seller for uncertain performance
• Real estate separation can reduce the business purchase price while giving the seller ongoing rental income
• Equity rollovers let the seller participate in future upside, bridging valuation gaps

The best deals are not the ones where you pay the lowest multiple. They are the ones where the structure creates alignment between buyer and seller over the long term.