Definition
A valuation multiple is a price expressed as a number of times a financial measure of a business, such as SDE, adjusted EBITDA, annual recurring revenue or revenue. Multiply the measure by the multiple and you get a value; divide a price by the measure and you get the implied multiple. A multiple is shorthand for what a buyer believes about the business's risk, growth and durability.
Seller's discretionary earnings (SDE)
Seller's discretionary earnings is the yearly financial benefit a business gives one full-time working owner, before financing costs, non-cash charges and one-off spending.
Adjusted EBITDA is EBITDA after normalising adjustments, showing what a business would earn with a paid manager in the owner's seat. Larger small-business deals are usually priced on it.
Worked example
Oakfield Veterinary Practice is a fictional UK business listed at £1,200,000, with SDE of £400,000.
Implied multiple = £1,200,000 divided by £400,000 = 3.0 times SDE.
A buyer who believes 2.5 times SDE is fair for this practice values it at £1,000,000. A change of half a turn in the multiple (0.5 times) moves the value by £200,000, which is why small differences in a multiple lead to long negotiations.
Why buyers care
A multiple only means something when you know what it is applied to. Three times SDE and three times EBITDA are very different prices for the same business, because SDE is usually the larger figure. Before you compare listings, check the earnings basis, the period it covers and whether stock or working capital is included in the price.
Multiples also move with quality. A steady revenue trend, a spread of customers, reliable records and less dependence on the owner all tend to support a higher multiple than a similar-sized business without them. Loupe's valuation tool starts from benchmark multiples by business model group, earnings basis and size, adjusts them for factors like these and shows each adjustment in a ledger. The result is indicative, not a formal valuation.
EBITDA is earnings before interest, tax, depreciation and amortisation. It helps compare operating profit across businesses, but it is not the same as cash.
Working capital is the money tied up in running a business day to day, mainly stock and money owed by customers, less money owed to suppliers. A sale needs to agree how much of it comes with the business.