How valuation multiples really work by sector

Every owner has heard a line like "in our sector, businesses sell for 6 times EBITDA". The number is reassuring because it is simple. The trouble is that it hides almost everything that matters. A multiple is not a price, it is the result of a price. It compresses expected growth, perceived risk and the quality of a company’s cash into a single number. Two SMEs in the same sector, with the same EBITDA, can sell at 4 times for one and 8 times for the other, and both multiples are correct. This article explains where a multiple really comes from, why it differs so much by sector, and which levers, the ones within your control, move it.

What a multiple actually measures

A multiple is shorthand for a present value of future cash. When a buyer pays 6 times EBITDA, they are saying, in effect: I get my money back in six years of profit if nothing changes, and I accept that wait because I believe profit will grow and that it is low risk. Reverse the logic and everything becomes clear. The higher the expected growth, the higher the multiple. The higher the risk, the lower it goes. Three forces therefore govern every multiple, across all deals and all sectors:

• Growth: profit growing 20 % a year commands a far higher multiple than flat profit, because the buyer is also buying the future years, not just the current one.
• Risk: how predictable revenue is, dependence on one client or one key person, cyclicality. The less uncertain the future, the more a buyer pays for each euro of profit.
• Cash conversion: two companies at the same EBITDA do not produce the same free cash if one devours working capital and invests heavily. The multiple adjusts to the quality of the cash, not just its amount.

A multiple is not a market price, it is an opinion about the future, compressed into one number. Change the perceived future and you change the multiple.

Why multiples vary so much by sector

If we see very different ranges across sectors, it is not by convention but because the three forces above take very different values in each. A few illustrative examples, to be read as orders of magnitude and not as fixed grids:

• Subscription software (SaaS) is often valued on a revenue multiple, not an EBITDA one, because revenue is recurring, predictable and growing fast. Low risk and high growth: the multiple climbs.
• A business services activity, recurring but people dependent, trades closer to a few times EBITDA. Recurrence supports the multiple, dependence on the team caps it.
• An industrial or distribution activity, capital hungry and cyclical, trades on lower EBITDA multiples, because cash flows back into machines and inventory and profit tracks the economy.
• An agency or project based activity, with no recurrence and reliant on a handful of large contracts, trades at the bottom, sometimes on profit rather than a high multiple, because the buyer cannot tell what next year will be worth.

The lesson is not to memorize the ranges. It is to understand that the sector is only shorthand for a profile of growth, risk and cash. An SME in services that has built genuine recurrence and reduced its dependence on the founder can be valued at the level of another sector that is reputed to be more expensive. The sector sets the starting point; your company sets the gap.

A worked example: two SMEs, same sector, price twice as high

Take two IT services companies, each at €4M of revenue and €600,000 of EBITDA. At first glance the "sector multiple" should give them the same value. It does not.

• Company A: 70 % of revenue recurring under contract, no client above 10 % of revenue, a management team that runs without the founder, clean accounts. A buyer happily pays 7 times, or €4.2M, because they are buying a readable future.
• Company B: same EBITDA, but 80 % of revenue in one off projects, two clients making up half the business, a founder who sells and delivers everything. The buyer drops to 3.5 times, or €2.1M, because they are buying risk.

Same sector, same EBITDA, price twice as high. The €2.1M gap does not come from the market, it comes from the structure of the business. I have watched owners discover in due diligence that their "sector price" halved over a single client that had grown too large. And that is good news, really: most of what separates A from B is built, over two or three years, through ordinary management decisions.

The levers that move your multiple

You do not control your sector’s range. You control your position inside it, and even beyond it. The levers that matter most, in their usual order of impact:

• Recurrence: turning one off sales into contracts, subscriptions or maintenance moves the business to the top of the range, sometimes into a higher range.
• Removing the founder from the center: as long as you are the salesperson, the project lead and the finance director, the buyer is buying a job, not a company. A team that works without you is one of the most powerful multipliers.
• Client concentration: a client at 40 % of revenue is a guaranteed discount. Spreading it, even partly, feeds straight into the multiple.
• Cash quality: controlled working capital and moderate investment mean EBITDA actually turns into cash. Buyers pay for cash, not for an EBITDA that never reaches the bank.
• Clean accounts: reliable financials, separate from personal spending, with margin you can explain, remove doubt. Doubt is always paid for with a discount.

None of these levers requires selling tomorrow. They improve the business while you run it, and they pay off on the day you decide to sell. To place yours on these dimensions, our value self assessment scorecard lets you rate each lever and see where the points dragging your multiple down are hiding.

How to read a multiple without being misled

• Always ask on what basis: a multiple of EBITDA, operating profit or revenue? The bases are not comparable and the confusion is expensive.
• Check the EBITDA used: a multiple on an EBITDA inflated by optimistic adjustments gives a flattering but unrealistic price. The buyer will normalize it.
• Separate enterprise value from equity price: the multiple gives an enterprise value; what you actually receive then depends on net debt and cash.
• Distrust "sector multiples" quoted without a source: they often mix listed companies, far larger and more liquid, with an SME, which heavily overstates the reality of an SME or startup sale.

A multiple is an excellent starting point for a conversation, provided you treat it as a symptom and not a verdict. The real work is understanding which features of your company push it up or down, then acting on the ones within reach. That is where the largest valuation gaps for an SME or startup are won, over several years.

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