In brief
- Sector multiples describe a range; firm-specific factors determine your position in it.
- Concentration, contract quality and owner dependence explain most of the spread.
- Deal structure carries the risk the headline multiple does not.
- The factors that move a multiple are buildable, which is why they are worth naming precisely.
The comparable is a range, not a number
Owners encounter valuation first as a sector rule of thumb — a multiple of earnings said to apply to firms of a certain type and size. These benchmarks are useful for orientation and misleading as a conclusion, because the observed range within any sector is wide.
The spread within a sector is generally larger than the spread between sectors. Understanding what places a business at one end of that range rather than the other is more valuable than knowing the average.
What moves a firm up the range
Recurring, contracted revenue with demonstrable retention, rather than repeat work resting on relationship.
Low client concentration, so that no single departure changes the economics of the business.
Revenue originated by a system — defined market, defined offer, defined process — rather than by the owner's personal network.
A leadership team holding real mandates, evidenced by decisions made without the principal.
Reporting that withstands scrutiny unaided, with clean owner compensation and no unexplained adjustments.
A defensible position: a specific reason clients choose this firm that is not the founder's personal reputation.
What moves it down
The inverse of each of the above, and one factor deserving separate mention: undocumented judgement. When the standard of good work exists only in the principal's head, a buyer cannot model quality after the transaction, and prices accordingly.
Concentration is the most commonly underestimated. Owners tend to view a small number of large, long-standing clients as evidence of strength. A buyer views the same fact as an unhedged exposure, particularly when those relationships belong to the person leaving.
Structure is the second multiple
A headline multiple communicates less than owners assume, because risk that is not priced into the multiple is placed into the structure instead. Two offers at the same nominal multiple can differ enormously once cash at close, deferred consideration, earnout length and performance conditions are compared.
This is why improving the underlying factors matters more than negotiating the headline. Terms follow confidence. A business that answers the durability question convincingly receives a better multiple and a better structure, and the second is often worth more than the first.
The spread within a sector is wider than the spread between sectors. Your position in the range is built, not given.
The Infrastructure Advantage™
Questions this raises
- What is a typical EBITDA multiple for a professional services firm?
- Published sector benchmarks give a range rather than a figure, and the range within a sector is wide. Position within that range is determined by firm-specific factors: revenue quality and recurrence, client concentration, leadership depth, reporting quality and dependence on the owner.
- Why is my business worth less than the sector multiple suggests?
- Sector multiples describe a distribution. A business sits below the midpoint when its earnings carry more risk than the comparable set — typically through client concentration, revenue that depends on the owner's relationships, thin leadership below the principal, or reporting that requires explanation.
- Can you increase a valuation multiple deliberately?
- Yes, though not quickly. The factors that determine position within a range are structural and buildable: converting revenue to contracted and recurring, reducing concentration, installing genuine leadership mandates and governance, and improving the quality of management information.
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