When businesses grow beyond the owner-operator stage, the conversation shifts. Instead of Seller’s Discretionary Earnings (SDE), buyers, lenders, and investors look to EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization.
EBITDA strips away financing choices, tax strategies, and non-cash accounting entries, leaving a clearer picture of operating profit. It’s the lens used most often in the lower middle market ($2M–$5M in value), where buyers are more likely to be private equity groups, family offices, or strategic acquirers.
The Simple Formula
Back-of-the-napkin EBITDA starts with net income and adds back a few line items that reflect financing and accounting decisions rather than core operations:
EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Unlike SDE, you don’t add back the owner’s salary or personal perks. The assumption is that professional management is in place or can be hired.
A Quick Example
Suppose your P&L shows:
- Net Income: $700,000
- Interest: $50,000
- Taxes: $80,000
- Depreciation: $100,000
- Amortization: $20,000
EBITDA = 700,000 + 50,000 + 80,000 + 100,000 + 20,000 = $950,000
That $950,000 is the figure many buyers and lenders use as a starting point when comparing your company to others in the same sector.
What the Market Data Shows
Surveys such as the IBBA & M&A Source Market Pulse Survey indicate that businesses in the $2M–$5M range often sell for multiples of 4.0× to 5.0× EBITDA.
The Pepperdine Private Capital Markets Report confirms a similar pattern, showing that lower middle market deals frequently trade between 4.0× and 6.0× EBITDA, depending on growth prospects, industry dynamics, and perceived risk.
Again, these are observed ranges, not carved-in-stone formulas.
Multiples in Context: Examples
Putting numbers to work:
- A regional service company generating $1M in EBITDA could reasonably attract offers in the $4M to $6M range, consistent with common market multiples.
- A manufacturer with $2M EBITDA and strong recurring contracts might push even higher if buyers see low risk and strong growth opportunities.
- A company with $1M EBITDA but heavy customer concentration or dated systems could fall below 4×, despite the headline earnings.
The lesson: EBITDA is the entry point for valuation, but buyers adjust up or down based on risk, documentation, and growth.
How Lenders View EBITDA
Even in larger transactions, lenders don’t simply accept market multiples. SBA and conventional lenders test whether EBITDA comfortably covers debt service — the Debt Service Coverage Ratio (DSCR).
If the DSCR falls short, financing limits the deal, even if buyers are willing to pay more. That’s why some businesses transact below the “average” multiples: the financing has to work, not just the math on paper.
Key Takeaway
Back-of-the-napkin EBITDA math can help owners get oriented. But the true outcome depends on details: recurring revenue, management depth, customer concentration, and lender requirements. In today’s market, multiples for lower middle market businesses often fall between 4× and 6× EBITDA, but deals close higher or lower depending on confidence in the earnings.
The number is just the starting point. The real driver of value is how believable those earnings are in the eyes of buyers and lenders.
Simone Dominique is an industry analyst focused on the human side of business transitions. Through her writing and research, she provides clarity on the M&A process for owners and buyers, exploring the intersection of market data and owner psychology.
