REDUCED MULTIPLES
FOR SMALLER SELLERS
Smaller firms, such as revenues under $10M, usually receive reduced multiples. The reasons are many, as follows:
- Valuation Discount
- Smaller companies typically have more volatile earnings, less diversified revenue streams, and a higher risk of failure. Investors demand a higher return for taking on this risk, which lowers the multiples.
- Less Market Power
- Large companies often benefit from economies of scale, stronger brand recognition, and better access to resources, allowing them to generate more stable cash flows.
- Lower Liquidity
- Smaller, private companies are often harder to buy and sell, leading to lower valuations. Investors and buyers expect a discount for the reduced ease of exit.
- Limited Access to Capital
- Larger companies can raise funds more easily through public markets, debt financing, or private equity; while smaller companies face higher borrowing costs and fewer financing options.
- Customer Concentration
- Smaller firms usually have fewer customers, as well as revenue concentrated in only a small number. Growth may be limited.
- Owner Dependence
- Many small businesses rely heavily on their founders or key individuals. Buyers often discount valuations due to the risk that performance will decline if those individuals leave.
- Less Competitive IP
- Smaller firms generally have weaker competitive advantages (e.g. patents, technology, brand recognition) compared to larger firms, making them more vulnerable to competition.
- Fewer Buyers
- The pool of potential acquirers is often smaller, leading to less competitive bidding and lower multiples.