The Multiple Myth - Why Comparables Mislead Business Owners Planning Their Exit

The business owner sat across from us, confused and frustrated. His industry association had just published a report showing average transaction multiples of 5.2x EBITDA for companies like his. Yet the preliminary indication of interest he’d received valued his company at 3.8x—a difference representing nearly $2 million on his $1.4 million EBITDA. “The data says I should get more,” he insisted. What he didn’t yet understand was that his business characteristics—42% revenue concentration in his top customer, his personal involvement in every major client relationship, and project-based revenue with no recurring contracts—placed him well below the industry average, regardless of what the headline number suggested.

Executive Summary

Industry average multiples provide useful context but are insufficient on their own for predicting any individual transaction outcome. When we tell business owners that companies in their sector trade at “4x to 6x EBITDA,” we’re sharing a statistical reference point that obscures significant variance: actual transactions in that same sector regularly close across a wide range, with the spread driven by company-specific factors that averages cannot capture. This analysis reflects U.S. mid-market M&A dynamics for businesses in the $2 million to $20 million revenue range.

This article examines the limitations of comparable transaction analysis and provides practical understanding of what influences where your business will fall within industry ranges. We identify the specific business characteristics that correlate with multiple differentiation: revenue quality, operational independence, competitive position, and financial performance. We also provide a framework for honestly assessing how your company’s particular attributes will position it relative to industry benchmarks.

The goal isn’t to help you argue for a higher multiple. It’s to help you understand what you’d need to change to actually justify one. The factors that correlate with premium multiples aren’t negotiating tactics; they’re business characteristics that sophisticated buyers assess consistently. Understanding these factors years before your exit gives you the opportunity to address them strategically, rather than discovering them as limitations during deal negotiations. Business characteristics influence baseline multiple, but actual outcomes also depend on buyer selection, competitive bidding, deal structure, market timing, and negotiation execution.

Introduction

Every business owner preparing for an exit eventually encounters “the multiple question.” Advisors, peers, and industry publications all reference multiples as if they were fixed exchange rates: reliable conversions from earnings to enterprise value. The manufacturing sector trades at 5x. Professional services at 4x. Technology at 7x. These figures get repeated so often that owners begin treating them as market prices rather than what they actually are: statistical averages with significant standard deviations.

The comparable transaction approach to valuation—looking at what similar companies sold for and applying those multiples to your business—sounds logical. It’s how we value houses, after all. But businesses aren’t houses. Two manufacturing companies with identical revenue and EBITDA can sell at meaningfully different multiples based on factors that don’t appear on any financial statement: customer concentration, management depth, recurring revenue percentage, competitive positioning, and growth trajectory, among dozens of others.

We’ve observed this pattern consistently across transactions in our practice. Consider two distribution companies we advised in successive years, both with approximately $1.5 million EBITDA. The first sold at a significantly lower multiple than the second. Not because of market timing or negotiating skill, but because of underlying business quality differences. The first had substantial customer concentration (its largest customer represented over 35% of revenue) and an owner who managed every key relationship personally. The second had diversified revenue (no customer exceeded 10%) and a sales team that operated independently. Same industry, similar size, similar profitability, materially different outcomes. The variance reflected buyer assessment of risk and transition complexity, not market conditions.

Understanding why this variance exists, and where your business falls within it, requires moving beyond the comfortable simplicity of market multiples and embracing a more complex framework for thinking about valuation.

Why Comparable Transaction Analysis Has Limitations

The challenge with comparable transaction analysis is that perfectly comparable transactions are rare. Every business is unique, and the factors that matter most to buyers (the factors that drive multiple differentiation) are precisely the factors that vary most between ostensibly “comparable” companies.

The Averaging Problem

When industry reports cite average multiples, they’re combining transactions that may not be directly comparable. A lower-multiple deal where the seller was under time pressure and accepted less favorable terms gets averaged with a premium deal where multiple strategic buyers competed aggressively. A transaction involving a company with declining revenue gets combined with a sale of a fast-growing market leader. The average tells you relatively little about either transaction. And little about what your company might command.

Transaction databases consistently show meaningful variance around industry averages. In our experience analyzing transaction data and observing deals in our practice, valuation multiples within the same industry sector can vary by multiple turns of EBITDA depending on company-specific characteristics. Even within narrowly defined industry codes, the range of transaction multiples typically spans 1.5 to 2.5 turns or more. When someone tells you the “market multiple” is 5x, what they’re really conveying is a central tendency around which actual transactions distribute. Some meaningfully higher, some meaningfully lower.

On a $2 million EBITDA business, even a one-turn variance represents a $2 million difference in enterprise value. This uncertainty is manageable with proper planning, but it underscores why relying solely on averages creates false precision.

The Selection Bias Problem

Reported transaction data suffers from selection bias. The deals that get reported (either through industry surveys or database services) tend to skew toward larger, cleaner transactions. Smaller deals, distressed sales, and transactions with unusual structures or below-market multiples often don’t get reported at all. This creates potential inflation in published averages that can mislead owners about realistic expectations.

Additionally, reported multiples rarely account for deal structure differences. A headline multiple of 5x might actually be 4x cash at closing plus an earnout that may or may not pay out. Another 5x deal might be 5x all-cash with favorable working capital treatment. The reported multiples look identical; the actual economics to the seller differ meaningfully.

The Timing Problem

Comparable transaction data is historical by definition. By the time transactions close, get reported, and appear in databases, market conditions may have shifted. Using 12-18 month old transaction data to value a business in current market conditions adds another layer of uncertainty. This matters most in sectors experiencing rapid change. Which increasingly describes most sectors.

The Real Drivers of Multiple Variance

If market multiples alone don’t determine value, what does? Our experience across transactions reveals consistent patterns in what correlates with multiple differentiation. Understanding these factors, and honestly assessing where your business stands on each, provides more useful guidance than comparable transaction analysis alone.

Revenue Quality and Predictability

Revenue predictability is associated with higher valuations, though businesses with predictable revenue often have other attractive characteristics as well. Buyers typically focus on future cash flows, and their confidence in those cash flows influences what they’ll pay.

Recurring revenue correlates with premium multiples. A business with substantial contractually recurring revenue will generally command better multiples than a comparable business generating revenue through discrete transactions. This correlation is strongest in sectors where recurring contracts translate to predictable cash flows, and the magnitude of the effect varies by industry and buyer type. Strategic buyers may weight it differently than financial buyers. Subscription models, long-term service contracts with renewal history, and maintenance agreements all create the predictability that supports premium pricing. The value of recurring revenue depends on contract quality: term length, renewal rates, pricing power at renewal, and customer switching costs all influence how buyers assess it.

Customer concentration influences buyer risk assessment. When a single customer represents a substantial portion of revenue, or when the top customers collectively represent a large share, buyers adjust their valuation to reflect the concentration risk. But the actual risk depends on more than revenue percentage. A customer representing 25% of revenue under a five-year contract with high switching costs and a stable 15-year relationship presents different risk than a 15% customer with no contract buying commodity products. Assess actual probability of loss based on contract terms, relationship quality, and switching costs. Not revenue percentage alone.

That said, buyers do notice concentration. Our observation is that meaningful concentration (where losing one or two customers would materially impair the business) typically results in multiple compression, with the severity depending on the specific circumstances. The reduction might range from modest to substantial depending on contract protections, relationship stability, and buyer risk tolerance.

Revenue trajectory influences valuation. A smaller company growing meaningfully will often command similar or better multiples than a larger company with flat growth. Buyers pay for trajectory, not just current position. Consistent growth over multiple years (demonstrating sustainability rather than a single good year) can meaningfully improve your positioning within industry ranges.

Operational Independence

Buyers aren’t just purchasing cash flows. They’re purchasing businesses they need to operate. The degree to which a business can operate independently of its current owner influences both multiple and deal structure.

Management team depth correlates with higher multiples. When a capable management team can run the business without significant owner involvement, buyers face lower integration risk. This correlation is strong, though causation runs in multiple directions: profitable businesses can afford better managers, and better managers create more profitable businesses. The practical implication remains: businesses with demonstrated operational independence (where key relationships, decisions, and functions don’t depend on the owner) tend to command better valuations.

But management development requires sufficient business scale to support additional overhead. For smaller businesses in the $2-4 million revenue range, documented processes and cross-training may be more cost-effective than additional management layers. The economics of management investment differ significantly based on your revenue base and margin structure.

We assess operational independence through a thought experiment: if the owner were unavailable for 12 months, how would the business perform? Businesses that would continue performing well command better multiples. Businesses that would experience meaningful degradation get valued accordingly. Most businesses fall somewhere on this spectrum rather than at the extremes.

Documented processes and systems provide evidence of resilience. Buyers value businesses with documented procedures, established systems, and institutional knowledge that isn’t locked in individual people’s heads. The documentation itself isn’t the value driver. Rather, it’s evidence that the business has operational depth and resilience that survives personnel changes. Companies that have documentation because they’re operationally mature tend to perform better post-transaction.

Competitive Position and Market Dynamics

Where you sit in your market, and where that market is headed, influences multiple expectations.

Strong market positions correlate with premiums. Companies with leading positions in defined market segments tend to command better multiples than smaller competitors, though the magnitude varies significantly by industry. This applies when market position can be sustained and defined market boundaries are meaningful to acquirers. Market leadership often suggests pricing power, customer preference, and competitive resilience. But the definition of “market” matters enormously. Being the leader in a shrinking niche may be less valuable than being a strong competitor in a growing segment. Strategic buyers may value market position differently than financial buyers depending on their existing portfolio and strategic objectives.

Market trajectory affects all participants. A company in a high-growth market often attracts more buyer interest than a similar company in a declining market. Buyers pay for tailwinds. If your industry faces structural headwinds (technological disruption, regulatory pressure, demographic shifts) expect this to influence buyer enthusiasm and pricing. But market conditions are cyclical, and buyers understand this. A strong company in a temporarily depressed market may still command reasonable multiples from buyers with longer time horizons.

Differentiation influences valuation. Companies with genuine competitive advantages (proprietary technology, exclusive relationships, unique capabilities, strong brands) tend to command better multiples. Commodity businesses competing primarily on price typically see more compressed multiples, regardless of execution quality.

Financial Performance Quality

Not all EBITDA is created equal. Sophisticated buyers look beyond the headline number to assess the quality and sustainability of earnings.

Clean financials support buyer confidence. When your financial statements require extensive adjustments and normalizations, buyers may lose confidence in the underlying numbers. The concern isn’t legitimate adjustments (removing one-time expenses, normalizing owner compensation, adjusting for non-recurring items) but rather the volume and complexity of adjustments required. Normal adjustments include owner compensation above market rate, one-time legal or settlement costs, and non-recurring revenue items. Concerning patterns include inconsistent revenue recognition, undocumented related-party transactions, and adjustments that represent a large percentage of stated EBITDA. Buyers expect some adjustments; they grow cautious when adjustments become the story.

Margin sustainability matters more than absolute margin level. Higher-margin businesses often command better multiples, but the relationship is more complex than simple cause and effect. High margins may indicate pricing power and competitive advantage. Or they may indicate underinvestment in growth, small scale, or unsustainable pricing. What buyers really assess is margin sustainability: can these margins be maintained or improved under new ownership? Margin trends over time often matter more than current margin levels.

Working capital efficiency influences effective value. Businesses with heavy working capital requirements (large receivables, significant inventory, long cash conversion cycles) may command different valuations than asset-light businesses. Buyers must fund that working capital, and they factor the requirement into their analysis. This doesn’t necessarily reduce the multiple, but it does reduce net proceeds to the seller when working capital adjustments are made at closing.

Assessing Your Position Honestly

Understanding multiple drivers intellectually differs from honestly assessing where your business falls on each dimension. Most owners overestimate their positioning. Not from dishonesty, but from the natural optimism required to build a business. Accurate self-assessment requires objectivity.

The Multiple Positioning Framework

For each major multiple driver, assess your business honestly:

Revenue Quality Assessment:

• What percentage of revenue is contractually recurring, and what are the contract terms?
• What percentage do your top three and top five customers represent?
• What has your revenue growth rate been over the past three years?
• How would you characterize revenue predictability quarter to quarter?

Operational Independence Assessment:

• Could your management team run the business for 12 months without you? What would degrade?
• Are critical processes documented and actually followed?
• Do customer relationships survive personnel changes, or are they personally held?
• What decisions can only you make, and why?

Competitive Position Assessment:

• Where do you rank in your defined market segment?
• Is your market growing, stable, or declining?
• What specifically prevents competitors from taking your customers?
• How would a strategic buyer view your competitive position?

Financial Quality Assessment:

• How clean are your financial statements? How many adjustments does EBITDA require?
• What is your EBITDA margin relative to industry norms, and is it sustainable?
• What are your working capital requirements relative to revenue?
• Are there financial complexities that would require extensive explanation?

Honest answers to these questions will tell you more about your likely positioning than any comparable transaction database.

Different Buyer Types Have Different Priorities

This article has discussed “buyers” as if they were a monolithic group, but strategic buyers, financial buyers (private equity), and internal buyers (management buyouts) evaluate businesses differently.

Strategic buyers often pay premiums for businesses that fill capability gaps, provide market access, or create synergies with existing operations. They may care less about customer concentration if they can cross-sell to their existing customer base or absorb the concentrated customer into a larger portfolio.

Financial buyers focus heavily on cash flow predictability, management team quality (since they’ll need the team to run the business), and growth potential. They’re often more sensitive to concentration risk and owner dependence because they’re not bringing operational capabilities to solve these issues.

Internal buyers (management teams) may accept different deal structures including seller financing and earnouts, and may have different risk tolerances based on their knowledge of the business.

Understanding your likely buyer universe helps you prioritize which factors to address.

Working With Reality

The point of this assessment isn’t to discourage you. It’s to empower realistic planning. If you’re three to five years from your intended exit, identified weaknesses become action items rather than limitations. Customer concentration can potentially be addressed through deliberate diversification, though this typically requires sustained sales investment over multiple years and may temporarily pressure margins while building new relationships. Management gaps can be filled. Systems can be documented. Revenue can be made more recurring.

But this work takes time (more time than most owners initially estimate) and not all improvements are worth pursuing. The right question isn’t “how do I fix everything?” but rather “which improvements will create the most value relative to the effort and cost required?”

Realistic implementation timelines:

• Near-term improvements (6-12 months): Financial statement cleanup, process documentation, beginning management development
• Medium-term improvements (18-36 months): Meaningful customer diversification (if starting from modest concentration and with strong sales capabilities), developing recurring revenue streams, building management depth
• Long-term improvements (36-48+ months): Significant customer diversification from high concentration, full management succession, business model transformation

Diversification efforts carry risks including opportunity cost from reduced focus on existing customers and uncertain success in new customer acquisition. Consider staged approaches with clear milestones and stop-loss criteria.

Owners who wait until they’re ready to sell to discover their positioning often find themselves accepting whatever the market offers. Owners who understand their positioning years in advance can strategically address factors that will have meaningful impact.

Case Study: The Economics of Improvement

Let’s return to the business owner from our opening. His initial indication of 3.8x reflected real concerns: 42% customer concentration in his largest account, his personal involvement in all major relationships, and project-based revenue with no contractual recurring component. Industry averages typically reflect businesses without significant concentration risk or owner dependence. The 5.2x benchmark was never a realistic target for his company given these characteristics.

Over six months before re-engaging with buyers, he made targeted improvements:

• Negotiated a two-year service contract with his largest customer, converting some project revenue to recurring revenue and reducing perceived concentration risk
• Transitioned three key customer relationships to his operations manager, demonstrating the relationships could survive his exit
• Documented his sales and estimation processes, showing operational maturity

The financial reality: These improvements required approximately $40,000 in direct costs (legal fees for contracts, consulting support for documentation) plus substantial management time. His EBITDA during this period actually declined slightly as he invested in the sales manager’s development and took time away from revenue-generating activities.

The eventual sale at 4.2x on $1.35 million EBITDA (down slightly from $1.4 million) yielded enterprise value of approximately $5.67 million versus the initial indication of approximately $5.32 million (3.8x on $1.4 million). A net improvement of roughly $350,000. Against the $40,000 direct cost and opportunity costs of his time, this represented a positive but not transformative return.

The honest assessment: The improvement was worthwhile but modest. The larger lesson was that he couldn’t reasonably expect the industry average multiple given his business characteristics. The six-month effort moved him from the lower end of the realistic range toward the middle. It didn’t transform a 3.8x business into a 5.2x business.

Critical caveat: Results vary significantly, and this represents one specific situation with particular circumstances that enabled success. Including a major customer willing to negotiate a service contract and relationships that successfully transferred to another manager. In our experience, not all improvement efforts succeed. Some business owners invest similar time and resources only to receive comparable or lower offers because contract negotiations fail, relationships don’t transfer successfully, or market conditions shift unfavorably. Before pursuing improvement initiatives, honestly assess your probability of successful execution, not just the potential upside.

What could have gone differently: If the service contract negotiation had failed, or if customer relationships hadn’t transitioned successfully, he might have invested six months and $40,000 only to receive a similar or lower offer. Improvement efforts carry execution risk, and the outcome isn’t guaranteed.

Alternative Strategies to Consider

Improving business metrics isn’t the only path to better exit outcomes. Before pursuing major improvement initiatives, consider whether alternative strategies might achieve similar or better risk-adjusted outcomes for your specific situation.

Earnout structures can bridge valuation gaps when buyers are uncertain about future performance. If you’re confident in the business’s trajectory but can’t convince buyers to pay for it upfront, earnouts allow you to capture that value if performance materializes. The tradeoff: you bear continued risk and receive deferred payment rather than immediate liquidity. Earnouts work best when performance metrics are clearly measurable and within your control during the earnout period.

Strategic buyer targeting may yield better outcomes than broad marketing if specific acquirers would realize synergies or strategic value that financial buyers wouldn’t. The extra value from synergies can translate to higher multiples. The tradeoff: a narrower buyer universe means less competitive tension and potentially more concentrated negotiating leverage on the buyer side.

Immediate sale without improvements deserves honest consideration. When improvement costs exceed likely value creation, when market timing is favorable, or when you need liquidity now, accepting your current positioning may be the right choice. The tradeoff: potentially leaving value on the table versus investing time and money with uncertain returns.

Recapitalization with continued ownership (taking some chips off the table while retaining equity) may be appropriate if you’re not ready for full exit but want liquidity and risk reduction. The tradeoff: you remain operationally involved and bear ongoing business risk, but you’ve diversified your personal wealth.

Extended transition periods with seller involvement can sometimes command better pricing from buyers who value continuity and are willing to pay for reduced transition risk. The tradeoff: you remain tied to the business for an extended period after closing.

The right strategy depends on your specific circumstances, timeline, risk tolerance, and objectives.

What This Means For Your Exit Planning

The multiple myth creates two distinct problems for exit planning: unrealistic expectations and misallocated preparation effort.

Resetting Expectations

If you’ve been planning around industry average multiples without assessing your specific positioning, you may need to recalibrate. This doesn’t necessarily mean lowering expectations. If your business has strong multiple drivers, you may be positioned above average. But it does mean moving from comfortable averages to honest assessment of where your specific business characteristics place you.

Industry averages remain useful as starting reference points despite their limitations. They provide context for understanding where typical transactions occur and help identify whether your business is likely to fall above, at, or below the median.

We recommend developing three scenarios: a realistic base case reflecting honest self-assessment of your positioning, an optimistic case assuming favorable market conditions and competitive buyer interest, and a conservative case accounting for potential weaknesses and market uncertainty. Planning around a single “expected multiple” derived from industry averages creates false precision that can lead to poor decisions.

Prioritizing Preparation Activities

Understanding multiple drivers should reshape how you allocate preparation time and resources. Instead of generic “get the business ready” activities, focus specifically on the factors that will meaningfully influence your outcome.

If customer concentration is your biggest limitation and you have three or more years, prioritize diversification. But understand it requires sustained sales investment over 18-36 months or longer, depends on your current sales team capability and market receptivity, and may temporarily pressure margins. Not all diversification efforts succeed; set clear milestones and be prepared to reassess if progress stalls.

If owner dependence is limiting and you have two or more years, invest in management development. Recognizing this is a multi-year journey and that smaller businesses may need to focus on process documentation and cross-training rather than adding management layers that the business can’t economically support.

If revenue is project-based and you have time, look at creating recurring revenue streams. Understanding this may require business model evolution.

Critical reality check: Not all improvements are worthwhile. Before pursuing any significant improvement initiative, estimate the cost (direct and opportunity cost), the realistic multiple impact, the probability of successful execution, and the timeline required. Some businesses are better served by accepting their current positioning and optimizing for a good-enough exit than by pursuing expensive improvements with uncertain returns.

Actionable Takeaways

Use multiples as context, not targets. Industry average multiples provide useful reference points but are insufficient for predicting your specific outcome. Use them as starting context, not as expectations.

Assess your position honestly. Evaluate your business against the specific factors that correlate with multiple differentiation: revenue quality, operational independence, competitive position, and financial performance quality. Be objective rather than optimistic.

Identify your specific limitations. What characteristics of your business would cause a sophisticated buyer to adjust their valuation? Concentration risk? Owner dependence? Market headwinds? These limitations deserve focused attention if you have time to address them.

Evaluate improvement economics. Before pursuing any major improvement initiative, estimate the costs (direct and opportunity), realistic timeline, probability of success, and expected value impact. Not all improvements justify the effort. Consider alternative strategies like earnouts or strategic buyer targeting.

Understand your buyer universe. Strategic, financial, and internal buyers have different priorities. Understanding who is most likely to acquire your business helps you prioritize which factors matter most.

Match management investment to scale. Smaller businesses may benefit more from documented processes and cross-training than from adding management layers. Make sure management development investments match your revenue base and margin structure.

Develop realistic scenarios. Plan around a range of potential outcomes based on honest assessment, not a single expected multiple derived from industry averages.

Give yourself time. The factors that correlate with multiple differentiation take years to address meaningfully. The earlier you understand your positioning, the more options you have.

Conclusion

The multiple myth persists because it offers comfort. It’s reassuring to believe that “the market” will pay a predictable price for your business, that you can look up what companies like yours sell for, that your exit proceeds are somehow predetermined by industry averages. This comfort is misleading.

The reality (that your outcome will be influenced by specific characteristics of your specific business, assessed by specific buyers in specific circumstances) is more complex but ultimately more empowering. Because if your outcome isn’t predetermined by market averages, you have agency. You can influence where you fall within industry ranges by strategically addressing the factors that correlate with differentiation, and by positioning your business effectively for the right buyer types.

The business owner from our opening eventually understood why his business commanded less than the industry average. And importantly, understood that the average was never a realistic benchmark given his business characteristics. His targeted improvements moved him from 3.8x to 4.2x, a meaningful but modest gain that reflected realistic improvement potential. He couldn’t transform his business into a 5.2x company in six months, but he could address specific limitations that moved him toward the middle of the realistic range. His success depended on factors within his control (a willing major customer, transferable relationships, sufficient time) and different circumstances might have yielded different results.

The best time to understand what influences your outcome is years before you need to know. The second best time is now.