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1/12 | The Myth of Multiples

Masterclass 1/12: The Myth of Multiples
Why "5x or 6x" is a Dangerous Phrase

"My business is worth 5 times its profit." This is probably the most common phrase heard in the world of SMEs. It is also the riskiest. Not because it is false, but because it is incomplete.

Optionality Masterclass 1//12

In this first installment of our masterclass, we will deconstruct this "magic number" to understand what truly lies behind a "multiple."

The Reality: A Multiple is Built in 3 Layers

A professional buyer doesn't just pull a number out of a hat. They analyze your company across three levels of depth.

1. Financial Mechanics

This is the mathematical foundation. A buyer looks at your cash flow and asks a very pragmatic question: "Can this business support the debt required for its purchase while generating a return for me?"

Let’s look at a concrete example:

  • EBITDA: $1M

  • Debt Capacity: Approximately $2.5M to $3M

  • Target Return: 20% – 25%

These calculations naturally "frame" a value between $4M and $6M. This is your logical floor.

2. The Market

The buyer then looks at what is happening elsewhere (comparables). However, beware of hallway rumors. A transaction advertised at "6x EBITDA" often hides a complex structure:

  • 5x paid at closing (the actual cash).

  • 1x as a conditional earn-out (paid only if targets are met within 2 years).

The "true" multiple paid out at sale is almost always lower than the figure circulating in the market.

3. Risk Perception

This is where you gain or lose millions. The buyer adjusts their offer based on the strength and sustainability of your asset. Here are the three levers that move the needle:

  • Owner Dependence: If the business cannot function without you, the buyer sees a massive risk of value evaporating upon your departure. This is the most penalizing factor: it can slash your multiple by 1.0x to 2.0x. The less essential you are to daily operations, the more your business is worth.

  • Client Concentration: If a single client represents 30% or 40% of your revenue, your business is vulnerable. The buyer anticipates the worst: what happens if that contract ends? This fragility typically leads to a discount of 0.5x to 1.5x on your multiple.

  • Recurring Revenue: Conversely, if you have long-term contracts or a solid subscription model, you offer predictability. Buyers love peace of mind. A recurring business model can propel your multiple upward, often adding a premium of 1.0x to 3.0x.

The Startup Exception (SaaS, Tech, Medical)

If you are in the tech space, the rules change. Immediate profitability is often sacrificed for growth. Here, EBITDA is ignored in favor of revenue multiples (2x, 5x, or even 15x). But be careful: this figure depends entirely on your retention rate (churn) and your gross margin.

The Classic Error to Avoid

Never use a multiple from a different industry or from a company ten times larger than yours. Size and sector radically influence the risk perceived by the buyer.

Simon’s Tip: You don’t have "a" multiple. You have a value range that fluctuates based on how the market perceives your company.

Your Homework for This Week

To know where you truly stand, you must move beyond guesswork.
Don’t rely on what your neighbor said at the golf club.

Use our Preliminary Valuation Report to get an initial estimate based on your actual numbers and current market data. This is your essential starting point for the rest of this series.

Next article → 2/12: Normalized EBITDA. How a buyer reconstructs your profit, line by line, to find the "true" profitability of your business.