How private equity values a business

How does private equity value a business?

Private equity firms value a business by multiplying its adjusted EBITDA by a market multiple. The result is an enterprise value, the price of the operating business before debt and cash. Alpine Investors puts it this way: a buyer “will typically apply a multiple of EBITDA to arrive at an initial proposed value.”

The simple formula is:

Enterprise value = adjusted EBITDA x multiple

Everything else in valuation is about two questions. How much real, repeatable profit does the business earn? And how confident is the buyer that the profit will last and grow?

This guide covers both. It uses published market data from third parties. Capstreet does not publish multiples, and nothing here describes a Capstreet offer. For real numbers on your company, talk to your advisers and to buyers.

What is adjusted EBITDA?

Adjusted EBITDA is your earnings before interest, taxes, depreciation and amortization, changed to remove items that will not continue under new ownership. It is the profit number buyers care about most, because it shows what the business earns from operations.

Alpine Investors explains the path: start with net income, then add back interest, taxes, depreciation and amortization. After that, “one-time investments into the business, personal expenses, and owner compensation” may be added back to help a buyer see true profitability.

The numbers above are round and made up to show the math. They are not a Capstreet figure. Note the last line: if you pay yourself far less than a hired CEO would earn, the adjustment can go the other way. Buyers must cover the cost of whoever replaces your work.

Which add-backs do buyers accept?

Buyers accept add-backs that are one-time, personal or clearly outside the normal business, and that you can prove with records. They reject add-backs that look like normal costs with a new label. CapitalPad puts it plainly: “An expense is not removable simply because a seller calls it discretionary.”

A quality of earnings review tests each add-back. Our quality of earnings guide explains the process. The best step you can take is to keep clean books so every add-back has support. See the glossary entries on add-backs and adjusted EBITDA for short definitions.

What multiple do lower middle market companies get?

Published averages show that multiples rise with company size, but your own multiple depends on your business. CapitalPad, citing GF Data, reported that private equity buyers paid an average of 6.4x EBITDA for deals with $10 million to $25 million of enterprise value in the first nine months of 2025, 6.8x for $25 million to $50 million, and 8.3x for $50 million to $100 million.

Source: GF Data, as reported by CapitalPad in 2026. These are averages of different companies, not a formula that reprices your business.

CapitalPad also notes that published multiples disagree because providers measure different companies, deal types and earnings definitions. An asking price differs from a completed sale. An average differs from a median. Match the definition to your situation before you rely on any number. Our guide on EBITDA multiples in the lower middle market goes deeper, and the glossary defines the EBITDA multiple.

What makes a multiple go up or down?

The multiple reflects how durable your profit looks and how much risk the buyer takes. CapitalPad explains that smaller companies often trade at lower multiples because buyers must account for concentration, management depth, financing limits and the work needed to support growth.

Alpine Investors names five drivers of the multiple: “Your industry,” “The size of your business,” “The type of customers you serve,” “Whether you service them on a contractual or one time basis,” and “General economic trends impacting your industry.”

These factors explain why two companies with the same EBITDA can sell at different prices. One has repeat customers and a management team. The other depends on its owner and a few accounts. You can improve most of the factors in the table with work done before a sale.

Why is enterprise value not the amount you receive?

Enterprise value is the price of the operating business. Your proceeds depend on debt, cash, working capital, fees, taxes and how the deal is paid. CapitalPad states the bridge: “Equity value ≈ enterprise value − debt + cash,” and says the final amount depends on debt-like items, cash treatment, working capital and the purchase agreement.

Here is a simple example with round numbers, for illustration only.

Next come transaction fees, a working capital adjustment, taxes and the structure of payment. A buyer may pay part in cash, ask you to reinvest part as rollover equity, and pay part later as an earnout. Altair Advisers wrote in 2025 that private equity deals usually include cash, rollover equity and earnout payments. Ask your tax adviser how each piece is taxed.

How do rollover and earnouts affect value?

Rollover equity and earnouts move part of your price into the future, so they change both risk and reward. Rollover equity keeps you invested in the company. An earnout pays you later if the company hits agreed targets.

• Rollover equity. You reinvest part of your sale proceeds into the new company. Our rollover equity guide explains how it works. Rolled equity can grow, or it can fall, and it is not paid until a later sale.
• Earnouts. Altair Advisers says earnouts “allow the PE firm to bridge the gap between what they want to pay for your business and your desired price,” and warns that the metrics and timeframes “often seem to be just out of reach.” Read our earnouts guide before you accept one.

Compare offers by cash at closing, the amount at risk and the odds of getting paid. A higher headline price with a large earnout can pay less than a lower price in cash.

How does a buyer decide what your business is worth to them?

A buyer sets its price from what it can afford to pay and still reach its own goals. It looks at your profit, the debt it can raise and the growth it expects to build. Two buyers can value the same company differently for these reasons.

CapitalPad’s 2026 guide notes that debt capacity affects how much equity a buyer needs, and that interest rates affect the cash left after financing costs. A buyer with a plan to add other companies to yours may also pay more than a buyer who plans to run your company alone. Our buy and build strategy page explains that approach. Because of these differences, talking to more than one buyer gives you a better view of the market. Compare offers on terms, not only price.

How should you prepare for a valuation?

Prepare the facts a buyer will test, and fix what you can before the process starts. Strong preparation does not guarantee a higher multiple, but it reduces uncertainty, which helps price and speed.

1. Close your books monthly and keep three years of clean financials.
2. List every add-back and attach proof.
3. Show revenue by customer, product and contract type.
4. Document who does what, and hire or promote to cover gaps.
5. Gather contracts, especially those with change-of-control clauses.
6. Work with an adviser who knows deals. See our guide on working with an investment banker or advisor.

Our due diligence checklist shows the records buyers request, and our guide on preparing your company for a private equity sale gives a timeline.

Next step

You can read what Capstreet looks for on the deal criteria page and learn about the lower middle market on our lower middle market private equity page. To talk about your business in confidence, call 713-332-2700, email connect@capstreet.com or use the contact page.