--- title: "How Private Equity Values a Business: EBITDA Guide" description: "How private equity values a business: adjusted EBITDA, the multiple, add-backs and the factors that move price, with a worked example and market data." url: https://capstreet.multisites.ai/guides/how-private-equity-values-a-business publisher: Capstreet phone: +1-713-332-2700 contact: https://capstreet.multisites.ai/contact --- # How private equity values a business Private equity firms usually value a business as a multiple of adjusted EBITDA. They start with your profit, remove one-time and owner-related costs, then apply a multiple based on your size, industry, customers and growth. The multiple moves most with revenue quality, owner dependence and management depth. Owner guideUpdated November 10, 20267 min read ![Downtown Houston skyline, home of Capstreet](https://capstreet.multisites.ai/_astro/houston-skyline.CI1wBZKY_Z21lbxH.webp) ## Value = EBITDA times a multiple Buyers apply a multiple to adjusted EBITDA to reach an enterprise value. ## Add-backs raise EBITDA One-time costs and owner pay can be added back, but only with proof. ## Quality sets the multiple Recurring revenue, spread-out customers and a strong team earn higher multiples. ## Enterprise value is not your check Debt, cash, working capital and deal terms change what you take home. ## How does private equity value a business? Private equity firms value a business by multiplying its adjusted [EBITDA](https://capstreet.multisites.ai/glossary/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. Step Example (for illustration only) Net income $2,000,000 Add interest, taxes, depreciation, amortization $1,200,000 EBITDA $3,200,000 Add back a one-time legal settlement $150,000 Add back personal expenses run through the company $100,000 Adjust owner pay to a market salary for a replacement CEO $250,000 Adjusted EBITDA $3,700,000 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.” Usually accepted Often challenged One-time legal or settlement costs, with documents Recurring “one-time” costs that show up each year Personal expenses paid by the company, with receipts Marketing cuts that would hurt sales Owner pay above a market replacement salary Savings from staff you have not hired or fired yet Costs of a closed location or ended product line Pro forma revenue from contracts not yet signed A [quality of earnings](https://capstreet.multisites.ai/glossary/quality-of-earnings) review tests each add-back. Our [quality of earnings guide](https://capstreet.multisites.ai/guides/quality-of-earnings) 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](https://capstreet.multisites.ai/glossary/add-backs) and [adjusted EBITDA](https://capstreet.multisites.ai/glossary/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. Enterprise value tier Average multiple (first nine months of 2025) $10 million to $25 million 6.4x $25 million to $50 million 6.8x $50 million to $100 million 8.3x $100 million to $250 million 10.3x $250 million to $500 million 8.5x 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](https://capstreet.multisites.ai/guides/ebitda-multiples-lower-middle-market) goes deeper, and the glossary defines the [EBITDA multiple](https://capstreet.multisites.ai/glossary/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. Factor Pushes the multiple up Pushes the multiple down Revenue quality Recurring or contracted revenue, high retention One-time projects, short contracts Customer concentration Many customers, none above a small share One or two customers drive most revenue Management A team that runs the business without you Everything routes through the owner Cash conversion Profit turns into cash, low capital needs Heavy equipment, inventory or receivables Growth plan Specific opportunities with people and budgets Hopes that depend on unproven demand Financial records Monthly closes, audited or reviewed statements Late books, mixed personal costs 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. Line Amount Adjusted EBITDA $4,000,000 Multiple 6.0x Enterprise value $24,000,000 Less: debt paid off at closing $3,000,000 Plus: cash left in the business $500,000 Equity value before fees, taxes and adjustments $21,500,000 Next come transaction fees, a [working capital adjustment](https://capstreet.multisites.ai/glossary/working-capital-adjustment), taxes and the structure of payment. A buyer may pay part in cash, ask you to reinvest part as [rollover equity](https://capstreet.multisites.ai/glossary/rollover-equity), and pay part later as an [earnout](https://capstreet.multisites.ai/glossary/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](https://capstreet.multisites.ai/guides/rollover-equity) 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](https://capstreet.multisites.ai/guides/earnouts) 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](https://capstreet.multisites.ai/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](https://capstreet.multisites.ai/guides/working-with-an-investment-banker-or-advisor). Our [due diligence checklist](https://capstreet.multisites.ai/guides/due-diligence-checklist-for-owners) shows the records buyers request, and our guide on [preparing your company for a private equity sale](https://capstreet.multisites.ai/guides/how-to-prepare-your-company-for-a-private-equity-sale) gives a timeline. ## Next step You can read what Capstreet looks for on the [deal criteria](https://capstreet.multisites.ai/deal-criteria) page and learn about the lower middle market on our [lower middle market private equity](https://capstreet.multisites.ai/lower-middle-market-private-equity) page. To talk about your business in confidence, call 713-332-2700, email [connect@capstreet.com](mailto:connect@capstreet.com) or use the [contact page](https://capstreet.multisites.ai/contact). ## Frequently asked questions ### How does private equity value a company? Most firms apply a multiple to adjusted EBITDA to reach an enterprise value. Alpine Investors, a private equity firm, says a buyer will typically apply a multiple of EBITDA to arrive at an initial proposed value. The multiple reflects industry, size, customers and growth. ### What is a good EBITDA multiple for my business? It depends on size, industry and business quality. CapitalPad, citing GF Data, reported average multiples of 6.4x for deals with $10 million to $25 million of enterprise value in the first nine months of 2025. Your multiple can sit well above or below an average. ### What are add-backs? Add-backs are costs you remove from reported profit to show true ongoing earnings. Common examples are one-time expenses, personal costs and extra owner pay. Buyers accept add-backs they can prove with records and reject ones that look like wishful thinking. ### Is the enterprise value the amount I receive? No. Enterprise value is the price of the operating business before debt and cash. CapitalPad notes that equity value is roughly enterprise value minus debt plus cash. Working capital, fees, taxes and any rollover or earnout also change what you take home. ### How can I raise the value of my company before a sale? Build recurring revenue, spread your customers, document your processes, and build a management team that can run the business without you. Clean monthly financials and well-supported add-backs also help. Start 12 to 24 months before a sale if you can. ## Terms on this page - [Working Capital Adjustment](https://capstreet.multisites.ai/glossary/working-capital-adjustment) - [Lower Middle Market](https://capstreet.multisites.ai/glossary/lower-middle-market) - [Quality of Earnings](https://capstreet.multisites.ai/glossary/quality-of-earnings) - [Enterprise Value](https://capstreet.multisites.ai/glossary/enterprise-value) - [Adjusted EBITDA](https://capstreet.multisites.ai/glossary/adjusted-ebitda) - [EBITDA Multiple](https://capstreet.multisites.ai/glossary/ebitda-multiple) - [Rollover Equity](https://capstreet.multisites.ai/glossary/rollover-equity) - [Private Equity](https://capstreet.multisites.ai/glossary/private-equity) - [Buy and Build](https://capstreet.multisites.ai/glossary/buy-and-build) - [Due Diligence](https://capstreet.multisites.ai/glossary/due-diligence) ## Sources 1. [Alpine Investors: What to Know Before Selling your Business to Private Equity](https://alpineinvestors.com/resource/selling-your-business/) 2. [CapitalPad: Lower Middle Market EBITDA Multiples](https://capitalpad.com/lower-middle-market-ebitda-multiples/) 3. [CapitalPad: Lower Middle Market EBITDA Multiples](https://capitalpad.com/lower-middle-market-ebitda-multiples/) 4. [CapitalPad: Lower Middle Market EBITDA Multiples](https://capitalpad.com/lower-middle-market-ebitda-multiples/) Written by Capstreet and checked against the sources above on November 10, 2026. Market figures and deal practice change, and nothing here is legal, tax or investment advice. Ask your own advisers before you act. ## Keep reading - [EBITDA multiples in the lower middle market: what buyers paid and why prices differIn the first nine months of 2025, GF Data reported private equity buyers paying an average of 6.4x EBITDA for deals with enterprise value of $10 million to $25 million, and 6.8x for $25 million to $50 million. Averages hide wide gaps. Earnings quality, customers and management move your multiple.](https://capstreet.multisites.ai/guides/ebitda-multiples-lower-middle-market) - [Lower middle market private equity: what owners should knowLower middle market private equity means investing in smaller private companies, often founder-owned, with a few million dollars in earnings. Firms buy a stake, add management and capital, and grow the business. Definitions of the market vary by firm. Capstreet looks for companies with $3 to $15 million of EBITDA.](https://capstreet.multisites.ai/lower-middle-market-private-equity) - [Capstreet deal criteria: the companies we look forCapstreet looks for entrepreneur-owned business services companies with $3 to $15 million of EBITDA. We make primarily majority investments, and entrepreneurs reinvest alongside Capstreet. We want a tenured team, solid financials, a defensive business model, untapped growth potential and a niche advantage. We invest across 12 industries.](https://capstreet.multisites.ai/deal-criteria) - [How to prepare your company for a private equity sale: a 12 to 24 month planStart 12 to 24 months before you plan to sell. Clean up your financials, support every add-back, build a team that can run without you, spread your customer base and organize your records. Buyers pay more for earnings they can verify and a business that does not depend on one person.](https://capstreet.multisites.ai/guides/how-to-prepare-your-company-for-a-private-equity-sale) - [Buy and Build Strategy: How a Platform Company Grows Through Add-On AcquisitionsA buy and build strategy starts with one well-run platform company and adds smaller businesses to it over time. The goal is a larger, more capable company than any single piece could be. It fits fragmented industries best. Owners of smaller firms can sell to a platform and often stay on.](https://capstreet.multisites.ai/buy-and-build-strategy) - [The due diligence checklist for owners selling to private equityDue diligence is the buyer's check of your business after you sign a letter of intent. Private equity firms review five areas: financial (quality of earnings), operations, tax, HR and benefits, and legal. Owners who gather clean records before the process starts shorten it and face fewer surprises.](https://capstreet.multisites.ai/guides/due-diligence-checklist-for-owners) ## Ready to get started? Let’s talk. Tell us about your company and what you want next. Conversations are private, and there is no obligation. [Start a conversation](https://capstreet.multisites.ai/contact) [(713) 332-2700](tel:+1-713-332-2700)[connect@capstreet.com](mailto:connect@capstreet.com) ![Capstreet team members at a Houston elementary school for Houston Reads Day](https://capstreet.multisites.ai/_astro/houston-reads-day.DxNd9bIr_tggWP.webp)