Why Smaller Businesses Trade for Lower Multiples (and How to Use That to Your Advantage)

If you’ve spent any time looking at business acquisitions, you’ve probably noticed a pattern: smaller businesses almost always trade at lower multiples than larger ones. A $1M EBITDA business might sell for 3-4x, while a $10M EBITDA business could command 7-10x—or more.

Why does this happen? And more importantly, how can you use this to your advantage? Let’s break it down.

Why Smaller Businesses Sell for Lower Multiples

1. Perceived Risk

   • Smaller businesses often rely on a single owner, a handful of key employees, or a concentrated customer base. If any of these factors change post-sale, the business could take a hit.

   • Buyers (especially financial buyers) see small businesses as riskier, so they discount the valuation.

2. Limited Scalability

   • Many small businesses have grown as far as they can with their current resources. They might lack professional management, sales processes, or technology infrastructure.

   • Buyers looking for long-term growth prefer businesses that can scale quickly—so they pay higher multiples for them.

3. Financing Challenges

   • Institutional buyers (like private equity) prefer larger businesses because they can finance them more easily.

   • Smaller businesses often require creative financing—like seller notes or SBA loans—which limits the buyer pool and, in turn, valuation.

4. Owner Dependence

   • A business where the owner is the business (handling sales, operations, or client relationships) is a risky buy. If the owner leaves, the value could disappear overnight.

   • Larger businesses tend to have management teams in place, making them more attractive—and more valuable.

How to Use This to Your Advantage

For acquirers, the fact that small businesses trade at lower multiples is an opportunity:
✔ You can buy at a discount and scale to a higher valuation multiple.
✔ You can use seller financing and creative structuring to minimize cash outlay.
✔ You can build professional management and systems to de-risk the business and increase its value.

This is where multiple arbitrage comes into play. If you acquire a business at 4x EBITDA, grow it, integrate it into a larger platform, and later sell at 7x EBITDA, you’re not just making money from growth—you’re making money from valuation expansion.

Example: The Power of Multiple Expansion

Let’s say you buy a $2M EBITDA business at a 4x multiple ($8M purchase price).

• You improve operations, expand sales, and integrate better systems.

• Over time, you grow EBITDA to $5M.

• Now, as a larger and more stable business, buyers value it at a 7x multiple.

• Instead of being worth $20M (4x multiple), the business is now worth $35M (7x multiple).

You didn’t just grow EBITDA—you unlocked a higher multiple by building a bigger, more professionalized, and more scalable company.

What This Means for Your 2025 Strategy

If you’re an acquisition entrepreneur, business owner, or investor, smaller businesses trading at lower multiples shouldn’t be a deterrent—it should be an opportunity.

✅ Buy small at a discount
✅ Integrate, scale, and de-risk
✅ Exit at a higher multiple for exponential returns

It’s not just about what you buy—it’s about what you turn it into.

If you’re looking for businesses with room for multiple expansion in 2025, let’s talk.

-Matt 

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