Skip to main content

In a session with a buyer and seller, of a small manufacturing business, recently the subject of what multiple of profit or EBITDA small businesses sell for. A range thrown out was 3-10 times. As we settled into a discussion of why small businesses sell for 3-5 times of either profit or EBITDA some rationale was needed.

The example I gave seemed to make sense to both parties. I said that large firms my sell for 10-15 times earnings (the buyer had worked for a billion dollar firm at one point). However, if that large firm has a machine go down and it can’t be used for a month it’s a inconvenience but there are no real long-term ill effects.

If the small business has one machine go down for a month they fall behind on orders, customers may go somewhere else and may never come back. There are many other similar similar analogies I could have made with employees, vendors, computer systems and other things.

There is a lot more risk that a “small event” can have a major negative impact on a small business vs. a large company. That’s why the price-earnings ratio is so much lower than on mid-market or large firms. That and the terms of payment which is a subject for another post.

Get Started With A Consult

This field is for validation purposes and should be left unchanged.