Self-funded Search Investing Report: Financial benchmarks across SMB acquisitions
By Mainshares
Feb 6, 2025
Before analyzing potential investments, it’s helpful to know what other companies trade at (ie, their valuation multiples), along with industry-standard financial metrics, such as EBITDA, revenue, and enterprise value benchmarks. By comparing the financial performance and purchase price of your target acquisition to industry benchmarks, you can determine whether you’re getting a fair deal or not.
This article breaks down these characteristics using market data and provides insights into the factors driving these trends.
Why SMB valuation multiples are lower than multiples of larger companies
The average purchase multiples for small business acquisitions are significantly lower than those seen in lower-middle-market private equity and public companies.
Small business multiples: SMBs acquired by self-funded searchers typically range between 3x and 5x EBITDA, while independent sponsor deals can edge a bit higher than a 5x multiple for deal sizes larger than $5M EBITDA. These relatively lower multiples reflect the higher perceived risks and market inefficiencies associated with smaller-scale operations.
Lower-middle-market (LMM) PE and publicly-traded stocks: LMM PE deals average around 10x EBITDA multiple, while the S&P500 trades on average around a 15x multiple.
This disparity underscores the value opportunities in small business acquisitions for searchers willing to navigate the associated challenges.
Enterprise value (EV) and revenue ranges
While the complete market range for company enterprise value and revenue ranges is wide, we’ve broken down the percentage of deals within each EV and revenue range from our data set below:
Enterprise Value (EV):
< $4 million: 31% of targets
$4 million – $7.9 million: 35%
$8 million – $11.9 million: 19%
> $12 million: 15%
Revenue:
< $4 million: 26%
$4 million – $7.9 million: 35%
$8 million – $11.9 million: 35%
> $12 million: 22%
Common industries for searchers
The most common industries pursued by self-funded searchers and independent sponsors include:
Services: Dominating the landscape at 67%, these models are attractive for their recurring revenue and scalability.
Manufacturing: Accounts for 16% of deals, often requiring higher operational expertise.
Software: At 4%, this category represents high-margin, tech-driven opportunities.
Healthcare and other: Represent 5% and 8%, respectively, offering niche opportunities with specific operational requirements.
Lower multiples reflect risk
The lower multiples seen in small business acquisitions as compared to larger private equity deals and publicly-traded stocks highlight both the risks and inefficiencies in these markets.
These profiles emphasize the significant potential for value creation in this market, particularly for searchers and sponsors willing and determined to address operational inefficiencies and scale businesses effectively.
Conclusion
For search funds and independent sponsors, the small business acquisition market offers compelling opportunities at favorable valuations. By understanding the typical financial and operational characteristics of these targets, operators and investors can better position themselves for success.
Download the full Self-funded Search Investing Report for a full breakdown on the investing landscape.
Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.
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