Private Company Valuation

Why size sets the valuation multiple

Crossing roughly $5 million of EBITDA roughly doubles the multiple. Not the sector, not the margins. The size.

There is a threshold in American business that almost nobody talks about, and crossing it is worth more than almost anything else an owner can do.

It sits at about $5 million of EBITDA. Below it, companies change hands at roughly 2.9 times earnings. Above it, in the $5 million to $50 million band, the median is about 6.4 times. Same business, same industry, same margins, and the multiple roughly doubles.

That is a 124 percent jump for crossing one line.

The economy nobody prices

Public companies are repriced every few seconds by people who have never met them. A private middle-market company is repriced once, on the day it sells, by one buyer, using numbers the seller assembled.

This matters more than it sounds, because the middle market is not a niche. JPMorgan Chase estimates that roughly 12 million American businesses worth close to $10 trillion will change hands over the next decade, and only 8 percent of their owners say they have an advanced plan for it. That is the largest transfer of private wealth in the country's history, running through a market with no published price.

So owners use rules of thumb. Three times profit. Five times EBITDA. A broker's number. And because nobody publishes what actually clears, the rules of thumb never get corrected.

What the data says

I maintain an index built from 20,699 small-company listings, 7,601 of which carry a usable earnings multiple and 2,820 of which are verified as sold. Here is the size ladder, on an EV/EBITDA basis:

Read it twice. From the bottom band to the top, the multiple more than quadruples. Sector moves the number far less: the spread across industries is a fraction of the spread across size bands.

One honest caveat, because it changes how you should use this. 98 percent of the EV/SDE sample is sub-$5 million, which is Main Street and online SMB. The larger bands come from a broader universe and are stated on an EV/EBITDA basis. So this is not one clean series from $500,000 to $85 billion. It is two measurements of the same phenomenon, and the phenomenon is robust in both.

Why the jump happens

The size premium is not sentiment. Four mechanical things change when a company crosses roughly $5 million of EBITDA.

The buyer universe changes. Below the line, the buyer is an individual, a searcher, or a small sponsor, usually with SBA leverage and a personal guarantee. Above it, the buyer is an institution with a fund. Institutional money competes against other institutional money, and competition raises price.

Debt gets cheaper and larger. A $3 million business gets an SBA 7(a) loan against a personal guarantee. A $30 million business gets a credit facility priced off leverage ratios. More available debt at lower cost directly raises what a buyer can pay for the same earnings.

Key-person risk falls off. In a $2 million business the owner usually is the business. In a $20 million business there is a management team, and the buyer is purchasing something that survives the seller's departure. Buyers pay for durability.

The numbers become auditable. Small-company financials are assembled from a bookkeeping file, a tax return and an owner's spreadsheet, and those three routinely disagree. A buyer discounts what a buyer cannot verify.

That last one is now federal policy. Since October 2026, SBA rules require an independent business valuation on every change-of-ownership loan, and a quality of earnings report on any acquisition above $3 million. The government has decided the seller's own numbers are not good enough.

What this means if you own one

Growth compounds twice. Take a company at $3 million of EBITDA, valued at about 2.9 times, so roughly $8.7 million. Grow it to $6 million and it does not become $17 million. At the $5 million to $50 million band's 6.4 times, it becomes roughly $38 million. You doubled earnings and got more than four times the value.

Almost no other decision available to an owner has that shape. Cutting costs, switching industries, timing the market, none of them do this.

It also explains why selling too early is expensive. An owner who sells at $4 million of EBITDA because they are tired is selling from the wrong side of the line. The gap between 2.9 times and 6.4 times on $4 million is about $14 million, and that is the cost of stopping a year or two short.

And the ask-to-clear gap sits on top of all of this. Across the verified-sold set, sellers ask a median 3.26 times seller's discretionary earnings while deals actually clear at 2.58 times. Sellers are asking roughly 26 percent above where the market pays, which is its own problem and is not fixed by being bigger.

What it means if you buy them

The size premium is the entire economic engine behind the roll-up, and it is arithmetic rather than genius. Buy six companies at $1 million of EBITDA each for about 2.9 times. Combine them into one business earning $6 million. That entity prices in the $5 million to $50 million band at about 6.4 times. You paid roughly $17 million and you hold something worth roughly $38 million, before a single dollar of operating improvement.

This is why roughly 1,500 independent sponsors have appeared in the last few years, and why they all target $2 million to $10 million of EBITDA. They are buying below the line and selling above it.

It is also why the arbitrage is not free. It closes if the combined entity still depends on six owner-operators who all left, if the financials cannot be consolidated cleanly, or if the buyer overpays at entry because the seller anchored on a rule of thumb.

What to do with this

If you own a business below the line, the most valuable thing you can do before selling is not polish the pitch. It is get the numbers to agree with each other, build a team that outlasts you, and, if you can stand it, get past $5 million of EBITDA before you sell.

If you are buying, price the size band you are buying into, not the one you are buying from, and be honest about which of the four mechanisms above you can actually deliver.

And in either case, stop using a single multiple. Three times profit is not a valuation. It is a number someone repeated until it sounded like one.

One last thing, because it is the same argument

I did not grow up around any of this. No family in finance, no introductions, nobody to call.

What I had was work that could be checked. A model someone could open and argue with. A number with the method still attached to it.

That is how I got into the room at Fortune 500 in the USA, on a roughly $26 billion M&A deal, and at Columbia Business School in New York. Not through a door somebody held open. Through work somebody could check.

It is the same standard I am arguing for here. A business is worth what someone can verify it is worth. Three times profit is a rumor. A number with its method attached is a position you can defend, whether the thing being valued is a company or a career.

Related reading

Go deeper

If you are deciding whether to sell now or grow first, the size band you land in is usually worth more than the price you negotiate. Happy to work through where your business actually sits.

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Tomasz Felpel is an investor, founder, and advisor in private markets, based in New York. He publishes the Felpel Private Company Index and has priced more than 1,000 private companies.