Nobody Brags About Deal Terms
Why the multiples you hear about rarely apply to your business and what the headline leaves out
Almost every owner I've sat across from has a multiple in their head. Most of them can't say exactly where it came from, only that it came from somewhere real. A competitor sold a few years back and word got around about what they were paid. A trade publication ran a headline. Someone at the club, a couple of drinks in, mentioned that businesses like theirs were going for ten or twelve times earnings, and said it with the kind of confidence that turns a number into a fact.
The owners holding those numbers aren't being naive. The deals they heard about mostly did happen, at something close to the figures they heard. What tends to get lost in the retelling is what kind of business was actually sold, who did the buying, and how the money was really paid. Those details decide whether the number has anything to do with you.
The number you heard
A multiple feels like a property of the industry. Distribution businesses sell for this, software sells for that, and a good operator in a decent sector should expect to land somewhere near the going rate. It's a reasonable way to think, and it's how most owners first come to the question of what their business is worth. It also happens to be the way the numbers get reported, by sector, as if every buyer in that sector were shopping in the same aisle.
They aren't. The market for privately held businesses is really several markets stacked on top of each other, sorted mostly by size, and the gap between them is wider than most owners expect. Broadly, the family businesses I see trade somewhere in the four to seven times range, and they land there pretty reliably. The private equity firms working at this size tend to be anchored around five or six, and plenty of them have a genuinely hard time seeing the world at a higher number. GF Data, which tracks smaller US private equity deals, has the ones under about twenty-five million US landing somewhere in the mid-fives to the high-sixes. That sits toward the upper end of what I see, which makes sense, because private equity at this size is mostly picking off the better-organized businesses.
Size is only part of it, though. Businesses aren't uniform, and the label on one tells a buyer surprisingly little about how it makes its money. Two companies can both call themselves IT services firms, and one bills by the hour for whatever work happens to come in while the other has multi-year contracts with clients who would find it painful to leave. They'll get filed under the same sector, and a buyer is going to price them very differently. What moves a business toward the top of the range, or past it, has much more to do with how predictable the money is and how much of it depends on any one person or customer than with what the business calls itself. Double digits are rare, and in my experience they're largely reserved for much bigger businesses, the ones earning ten million a year and up, or for the occasional business with something very particular that a buyer can't find anywhere else. Some businesses won't get to the number you heard however well they're run, simply because of how the money comes in.
There's another wrinkle in where those numbers come from. A lot of the big multiples owners hear about are private equity exits, the price a fund got when it sold a business it had owned for several years. That's a very different number from the one it paid going in, and the fund's whole model depends on the gap between the two. It buys at five or six times, spends years building out management and bolting on acquisitions, and sells the larger, more organized result at ten or twelve, sometimes more. Funds measure themselves on how many times over they return the money they put in, and a good part of that return comes from buying at one multiple and selling at another. Much of the work in between is turning a business that depends on one person into one that doesn't, and the fund expects to be paid for doing it. So when a fund sells a company for ten, that number says very little about what it would pay for yours. It made its money precisely because it didn't pay ten on the way in.
Then there's the part of the deal nobody repeats. When a sale gets talked about, the only thing that travels is the headline. Nobody mentions that the ten was paid out over eight years, or that the twelve came with half the proceeds rolled into the buyer's company, to be paid out whenever that company gets sold again, if it does. Nobody talks about the earnout, or the slice held back in escrow, or the working capital adjustment that trimmed the price after closing. Terms like those can turn a ten into something a lot closer to a six or seven by the time the money is actually in the seller's hands, and into a good deal less if things go sideways. I've written before about how deal structure shapes what you actually get paid, and the short version is that the headline number and the money an owner ends up with are often further apart than anyone lets on.
Who actually shops at your size
At the very small end, businesses earning meaningfully less than a million a year, the buyer is often an individual. Usually a former executive, or someone who has spent years looking for the right business, financing the purchase with personal savings, bank debt and a meaningful amount of trust in the seller, and planning to run it themselves. Smaller strategic buyers show up at this size too, often a competitor or a neighbouring business that can fold yours into what it already does.
Past a million in earnings, something counterintuitive happens. As the business climbs, it actually gets harder to sell for a while, before it gets easier again. A company earning two or three million a year is too expensive for most individual buyers to finance and too big a bite for a smaller strategic, but it's still too small for the larger private equity funds, which typically want to put twenty or twenty-five million of their own money to work in a single deal. That usually means a business earning somewhere north of five million before they'll take a serious look. The buyers who do work in the gap are real. Independent sponsors, investors who find a company first and raise the money deal by deal, have grown quickly as a group over the last several years. Family offices buy here too, often quietly, and often to hold for a long time. Smaller funds and larger strategics, the competitors and suppliers who want your customers or your capabilities, round it out. There are just fewer of them than at either end, and fewer buyers is what keeps a price from climbing.
The private equity funds paying the headline multiples are mostly buying platforms further up the size range. When a fund buys a business it intends to grow, through its own expansion and by acquiring smaller companies and folding them in, the industry calls that first business a platform. The smaller companies bolted onto it are add-ons, and they're priced like add-ons, which usually means for less. If your business isn't the platform in a buyer's plan, there's a good chance it's being valued as a piece of somebody else's.
What's left when you strip it back
Put all of that together and most of the distance between the number an owner hears and the number on a real offer is accounted for. The business that sold may not have earned its money the way yours does. The price may have been a fund's exit rather than its entry. The headline may have been paid out over years, or partly in paper, or tied to targets the seller couldn't control. And the buyer who paid it may simply not be shopping at your size.
The number wasn't made up. It was a headline, though, and headlines leave out almost everything that decides what an owner actually walks away with. Measure real offers against one and nearly all of them will look disappointing.
What's harder to see, at least from the inside, is how much of the gap tends to come back to one thing, which is the person who built the business. How the money comes in, who can realistically buy it, and how a buyer chooses to structure the deal all bend around how much of the business still depends on its owner. That's a harder conversation, and it's the one I'll pick up in the next piece.
If there's a number in your head and you'd like to know how it holds up against the buyers who would realistically look at your business, and the terms they'd likely put in front of you, I'm always glad to have that conversation. It doesn't need to be the start of anything.
Part two follows in November. Subscribe to Peninsula Road Insights to get it when it's out.