Short answer
Private equity values your business as adjusted EBITDA times a multiple. EBITDA is your profit before interest, taxes, depreciation, and amortization. Adjusted EBITDA adds back your own above-market pay, personal expenses, and one-time costs to show a new owner's true earning power. The multiple depends most on whether you are a platform, the first business bought in an industry, or an add-on folded into an existing one; platforms earn much higher multiples. Reported ranges vary by industry: roughly 3 to 5.5 times for an HVAC add-on and 7 to 10 times for a platform, lower for plumbing, higher for a large IT managed services platform. Recurring revenue, a spread-out customer base, management that runs the business without you, and clean books all raise the multiple. A working capital peg trues up the final number, and above about $10 million, representations and warranties insurance is common. These are reported ranges, not offers.
Key facts
- The formula
- Adjusted EBITDA times a multiple. Both halves are negotiable and both are tested in the quality of earnings review.
- Adjusted EBITDA
- Profit plus owner add-backs: above-market pay, documented personal expenses, and one-time costs a new owner would not have.
- Platform vs add-on spread
- Platforms earn far higher multiples than add-ons in every industry. It is usually the biggest single factor in your number.
- What raises a multiple
- Recurring revenue, no single large customer, management depth so it runs without you, and clean, defensible books.
- Working capital peg
- A target level of receivables and inventory minus payables at closing. Miss it and the price drops by the shortfall.
- R&W insurance
- Representations and warranties insurance is common above roughly $10 million of enterprise value and can shrink the escrow.
The formula behind every offer
Private equity does not value a business the way a proud owner does. It uses a formula, and the formula is short: your business is worth its adjusted EBITDA times a multiple. Everything else, the reputation, the loyal crew, the decades of work, matters only through those two numbers. If you learn how each half is built, an offer stops being a mystery and becomes something you can check, question, and improve before you ever sit at the table. This page takes the two halves in order, then shows the reported multiples in your industry and the specific things that push your number up or down.
One rule applies to every figure below. The multiples are ranges reported in the market, drawn from deal data, not offers for your business. Your actual number depends on your specific financials, your size, and how you are positioned, and the only way to know it is to run a process. For the after-tax cash these numbers turn into, use the calculator; for how the whole deal works, start with selling to private equity.
What EBITDA is, and why buyers use it
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. In plain terms, it is a measure of the cash your business generates from operating, before the effects of how it is financed and how its assets are written off on paper. Buyers use it instead of net profit because it strips out things that will change under new ownership, like your loan payments and your depreciation schedule, and leaves a cleaner picture of the earning power they are buying. It is not a perfect measure, but it is the common language of these deals, so it is the number to know.
The add-back bridge to adjusted EBITDA
Raw EBITDA understates what your business is really worth to a buyer, because your books are full of costs that exist only because you own the company. Adjusted EBITDA corrects for that by adding those costs back. The path from one to the other is called the add-back bridge, and building it carefully is one of the highest-value things you can do before a sale. Three kinds of add-backs carry most of the weight.
Your above-market compensation
Most owners pay themselves more than they would pay a hired manager to do the same job. If you take $600,000 a year and a general manager would cost $200,000, the extra $400,000 is added back to profit, because a new owner would only bear the market cost. This is usually the single largest add-back, and it is well accepted, as long as the market salary you compare against is honest.
Personal expenses run through the business
Vehicles, travel, meals, phones, and family members on payroll who do not really work in the business are common add-backs, because a new owner would not carry them. The catch is documentation. An add-back you can show on paper survives diligence; one you simply assert gets removed. Padding this category is a mistake, because when the buyer's accountants throw out a soft add-back, they start doubting all your others.
One-time and non-recurring costs
A lawsuit, a storm, a failed software rollout, a one-time move, or the cost of an acquisition you made are added back because they will not repeat for the new owner. The word to defend here is one-time. If a cost happens most years, it is not one-time, and calling it that invites a price cut.
Suppose your raw EBITDA is $1.5 million and you defend $500,000 of legitimate add-backs, lifting adjusted EBITDA to $2 million. If your business trades at 6 times, that $500,000 of add-backs did not add $500,000 to your price. It added $3 million, because the price is 6 times the adjusted number. That is why the add-back bridge is worth building carefully, and why an add-back that gets removed in diligence is so costly. This is an illustration with its assumptions stated, not a valuation of any specific business.
The multiple, and the platform versus add-on spread
The second half of the formula is the multiple, and the biggest thing that sets it is whether you are a platform or an add-on. A platform is the first business a firm buys in an industry, the foundation it builds on, and it earns the top multiple. An add-on is a business folded into an existing platform and valued only for what it adds, so it earns less. This distinction is explained in full on the deal page, but its effect on price is worth seeing in one place: in every industry below, the platform multiple is often roughly double the add-on multiple. Your size and quality largely decide which side of that gap you land on, because only a business with enough scale and strong management can serve as a platform.
Reported multiples by industry
Here are the reported ranges for the fields this site covers. These come from market deal data and are shown as ranges, not offers. Each links to a fuller industry page.
| Industry | Add-on range | Platform range | What drives the number |
|---|---|---|---|
| HVAC | 3.0 to 5.5x EBITDA | 7.0 to 10x | Residential service and recurring maintenance push toward the top. |
| Plumbing | 2.4 to 4.0x | 5.0 to 6.5x | Often bought as an add-on to an HVAC platform for cross-selling. |
| Electrical | 3.2 to 5.0x | 6.5 to 8.0x | Residential service beats project and new-construction work. |
| IT managed services | 3.5 to 5.0x (under $5M EBITDA) | 11 to 15x or more (large platforms) | Recurring revenue mix is the top driver; cyber-heavy firms reach the highest end. |
| Insurance agency | 7.0 to 9.0x EBITDA; small books 1.5 to 2.5x commission revenue | 9 to 12x regional, higher for aggregators | Book retention above 90 percent supports the top band; benefits books earn more than property and casualty. |
| Marketing agency | 2.5 to 8.5x by size | 7 to 12x for larger, strategic firms | Retainer revenue above 60 percent adds turns; one client over 20 percent of revenue cuts the number. |
| Accounting and CPA firms | Not cleanly split into add-on and platform ranges; private equity now backs many large-firm platforms through a structure that separates the licensed attest firm from the rest of the business. | Recurring compliance work and staff retention drive value. | |
| Consulting and staffing | No clean current range; staffing typically trades at mid-single-digit multiples, and consulting varies widely. | Staffing is valued on the durability of its margins; consulting on how much depends on key people. | |
Two industry notes are worth pulling out. In IT managed services, the spread between a small firm and a large platform is the widest on this list, because recurring managed-service revenue is so highly valued; the reported deal volume there has been heavily private-equity-driven. In insurance, small agencies are often valued on a multiple of commission revenue rather than EBITDA at all, so a small book might be quoted at 1.5 to 2.5 times commissions while a larger agency is quoted on EBITDA. Read your own industry page for the detail.
What raises your multiple
Within any industry range, a handful of business qualities decide where you land, and most of them can be improved in the year or two before a sale.
- Recurring revenue. Service agreements, maintenance contracts, and retainers are worth far more than one-time projects, because the buyer can count on them. Shifting even part of your revenue to a recurring model lifts the multiple.
- Low customer concentration. If no single customer is a large share of your revenue, the business is safer to own. When one client is 20 percent or more of sales, expect a lower multiple and often an earnout tied to keeping that client.
- Management depth. If the business runs without you, the buyer is purchasing a company, not a job. A capable second layer of managers who will stay after the sale is one of the most valuable things you can build.
- Clean books. Well-organized financials that a buyer's accountants can verify quickly protect your price. Messy records invite doubt and a lower offer, or a price cut after diligence.
These four qualities do more for your final number than any argument over a fraction of a multiple, and unlike the multiple, they are within your control.
The adjustments that change the final check
The enterprise value, adjusted EBITDA times the multiple, is not what lands in your account. Several adjustments sit between it and your cash, and two are worth knowing here.
The buyer sets a target level of working capital, meaning receivables and inventory minus what you owe suppliers, that must be in the business at closing, based on your recent history. Deliver less than the target and the price drops by the shortfall; deliver more and you are paid for it. A peg set above your true normal level quietly transfers money to the buyer, so how it is calculated deserves close review by your advisor.
The second is representations and warranties insurance, which becomes common above roughly $10 million of enterprise value. It is a policy that covers the buyer if a promise you made about the business turns out to be wrong. When it is used, the buyer may hold back less of your money in escrow, because the insurer stands behind those promises, so it can put more cash in your hands at closing. The full set of adjustments, including escrow, rollover, and tax, is covered on the tax page and pulled together in the calculator.
When these numbers do not apply to you
The ranges on this page assume a healthy business of real size being sold in a competitive process. They do not describe every situation. A very small business, under about $1 million of EBITDA, often sells at the bottom of its range or to an individual buyer rather than a private equity platform, because it is too small to be a platform and only marginally useful as an add-on. A business in decline, or one where the revenue walks out the door with the owner, may not draw a private equity offer at all. And a single unsolicited offer with no competing bid tends to sit below these ranges, because nothing is pushing the buyer to pay up. If any of these describe you, the honest question is less about the multiple and more about whether now is the time to sell, which the deal page takes up directly.
What to do next
Start by building your own add-back bridge: take your raw EBITDA, list every legitimate add-back with the documentation to support it, and arrive at an honest adjusted EBITDA. Then find your industry range on the industry pages and place yourself in it based on your size, your recurring revenue, your customer spread, and how well the business runs without you. Multiply to get a rough enterprise value, then run that number through the calculator to see the after-tax cash, because the gap between the two is large. If the number matters enough to get right, a conversation with an advisor whose fee does not depend on whether you sell can be worth the hour; the contact page explains how a first conversation works.
Questions people ask
How does private equity decide what my business is worth?
It multiplies your adjusted EBITDA by a multiple. Adjusted EBITDA is your profit after adding back expenses a new owner would not have, mainly your own above-market pay, personal expenses run through the business, and one-time costs. The multiple depends on your industry, your size, whether you are a platform or an add-on, and the quality of your revenue and management. The whole number is your adjusted profit times that multiple, minus debt, which is where the working capital peg and other adjustments come in.
What is the difference between EBITDA and adjusted EBITDA?
EBITDA is your earnings before interest, taxes, depreciation, and amortization, straight off the books. Adjusted EBITDA takes that figure and adds back costs that exist only because you own the business, like paying yourself above what a hired manager would cost, running personal expenses through the company, or a one-time legal bill. Adjusted EBITDA is meant to show what the business would earn under a new owner, and it is the number the price is actually built on. The buyer's accountants test every add-back in the quality of earnings review.
What multiple will private equity pay for my business?
It depends heavily on your industry, your size, and whether you are a platform or an add-on. Reported ranges run from roughly 2.4 to 5.5 times EBITDA for trades add-ons up to double-digit multiples for large platforms with strong recurring revenue, such as a sizable IT managed services company. The industry pages give the reported ranges for each field. Treat these as ranges seen in the market, not as an offer for your specific business.
Why do platforms get a higher multiple than add-ons?
Because a platform is the foundation the buyer builds on, while an add-on is just an increment attached to it. A platform needs strong management, real systems, and enough size to grow around, so buyers compete for it and pay up. An add-on is valued only for what it adds to the existing group, so it fetches less. The gap is large in every industry, which is why being positioned as a platform, when your business is big and well-run enough, can be worth more than any negotiation over a point of multiple.
What raises my multiple the most?
Four things move the number most. Recurring revenue, like service contracts or retainers, is worth more than one-time project work. A customer base where no single client is a big share of revenue is safer than one that depends on a few accounts. Management that can run the business without you means the buyer is not buying a job. And clean, well-organized books mean the buyer trusts your numbers and does not cut the price after diligence. Fixing these before you sell is usually worth more than haggling over the multiple.
What is customer concentration and why does it lower my price?
Customer concentration means a large share of your revenue comes from one or a few customers. If one client is 20 percent or more of your sales, the buyer sees real risk that losing that client would wreck the business after they buy it. That risk shows up as a lower multiple, and often as an earnout, where part of your price is held back and paid only if the big customers stay. Spreading your revenue across many customers before a sale directly protects your number.
What is the working capital peg and how can it cost me money?
The peg is the normal amount of working capital, meaning receivables and inventory minus what you owe suppliers, that the buyer expects to be in the business at closing, based on your history. If you deliver less than the target, the price is reduced by the shortfall; if you deliver more, you are paid for it. A peg set higher than your true normal level quietly hands money to the buyer. It is a technical term buried in the agreement, but it can move real dollars, so have your advisor scrutinize how it is calculated.
What is representations and warranties insurance?
It is an insurance policy that covers the buyer if something you promised about the business in the contract turns out to be wrong. Above roughly $10 million of enterprise value it has become common, and it can work in your favor: because the insurer stands behind the promises, the buyer may hold back less of your money in escrow. It is not free and the buyer usually decides whether to use it, but it is worth understanding because it affects how much of your price you actually receive at closing.