Industry EBITDA multiples? Take them with a large pinch of salt

At Rockworth, we often speak to business owners who want to start a conversation about valuation by reference to ‘industry multiples’. Unfortunately, average EBITDA multiples for a given industry are often close to irrelevant when valuing a small or medium-sized business. This is not because multiples are totally useless in principle, but because the data behind them is usually not fit for purpose, particularly at the smaller end of the market.

Why “industry average” multiples are unreliable

Many published multiples are simple averages or medians drawn from heterogeneous deal sets. Without seeing the underlying data, it is impossible tell how wide the range is, whether the sample is skewed by outliers, or how statistically robust the figure really is.

There is also a structural bias in the available data. Deal values and multiples are more commonly disclosed for larger transactions. Larger deals, as a rule of thumb, command higher multiples because bigger companies give buyers and investors greater confidence in future cash generation, deeper management teams, and more diversified revenue. Smaller deals are less visible in public datasets, but if they were included in the same ‘industry average’, they would likely pull the number down.

The limits of ‘comparable transactions’

Sometimes a better starting point is to look for much closer comparable transactions – businesses with similar products, customers, geography, and scale, where some deal information is in the public domain. Even then, caution is required. At the smaller end, targets often don’t publish full P&Ls in their filed accounts, so getting a true picture of profits, performance, and the trend of growth and margins is not possible.

Where accounts do include a P&L, the EBITDA number negotiated for the deal is still invisible. Add-ons, one-off costs, owner-related expenses, and accounting policy choices can all shift the adjusted earnings number that was used, making it impossible to reverse engineer an accurate multiple. The commercial drivers that may have affected value also remain invisible. Factors such as customer concentration, contract terms, pipeline quality, or the strength of the management team could all have played a part.

Thinking about industry multiples in relative terms

Industry multiples are perhaps only helpful to smaller businesses as a general indication that some sectors command higher multiples than others. All valuations are, in principle, an assessment of the cash that a business will generate in the future. So, if it is typical within an industry to see business characteristics that give confidence in future earnings (such as recurring revenue models), then average multiples will be higher than sectors where cash generation is less certain or more volatile.

Importantly, even in an industry that typically commands higher multiples, there will be individual companies whose valuation falls far short of the average, due to factors such as heavy reliance on the owner, high customer or supplier concentration, volatile or declining earnings, weak financial records, project-based rather than recurring revenue, limited management depth, and operational or regulatory uncertainty.

What to focus on instead of wondering about average multiples

If you’re curious about multiples, a more productive question might be,  “what would make a buyer confident about my future cash flows?”. That is ultimately what drives value. Buyers pay for quality, resilience, and transferability. They discount for risk, fragility, and owner dependence.

For most smaller businesses, the biggest leverage comes from getting financial data organised so it clearly demonstrates performance, earnings quality, and future prospects. Clean, management-ready accounts, a clear narrative on growth drivers and margin trends, and evidence that the business can run without the founder, all help buyers underwrite the deal with more confidence and, often, at a higher price.

That’s where an advisor like Rockworth can help. We can work with you to put your best foot forward: stress-testing your numbers, identifying value drivers and risks, and giving you a realistic sense of what sort of valuation you might achieve, without tethering it to a spurious industry multiple.