Valuation
What valuation method is best for a lower-middle-market company?
Why a multiple of adjusted EBITDA usually leads for lower-middle-market companies, and when DCF, asset values or SDE matter more.
By Michael D. Rubin, CEO & Founder · September 2026 · 887 words
For most lower-middle-market companies, the best method is a market approach: a multiple of adjusted EBITDA based on what buyers pay for comparable companies, cross-checked against an income approach and an asset floor. That is how the buyers who will make offers value the company, so it is the method that predicts price best.
Here the lower middle market means privately held companies in roughly the $3 million to $100 million revenue range, the size MDR & Associates sells. The rest of this answer explains the three approaches, why the earnings multiple usually leads, and when another method should carry more weight.
The three approaches in plain terms
Professional valuers group methods into three families. A careful valuation looks at all three, then explains which one it relies on and why. The reason to use more than one is simple: when two approaches land close together, you can trust the answer more; when they land far apart, something about the company needs a closer look.
| Approach | How it works | Best fit |
|---|---|---|
| Market approach (multiple of earnings) | Adjusted EBITDA, or seller's discretionary earnings, times a multiple drawn from comparable sales | Profitable, established companies, which describes most of the lower middle market |
| Income approach (discounted cash flow) | Projects future cash flow and converts it to today's value at a rate that reflects risk | Companies whose future will clearly differ from the past; mainly a cross-check |
| Asset approach | Fair value of equipment, inventory, receivables and other assets, less liabilities | Asset-heavy or thinly profitable companies; sets a floor |
Why the earnings multiple usually leads
Buyers of lower-middle-market companies, whether private equity groups, competitors or well-funded individuals, mostly think in multiples of earnings, and lenders underwrite on the same basis. When a valuation uses the same language as the buyers, it predicts their offers. Companies in this size range most often sell for three to seven times adjusted EBITDA. EBITDA is earnings before interest, taxes, depreciation and amortization; adjusted means owner-specific and one-time costs are added back so the figure shows what a new owner would earn.
The hard part is not the arithmetic. It is choosing the right earnings figure and the right place in the range. A multiple applied to unadjusted earnings, or a general industry average applied to a company with unusual strengths or risks, will miss in one direction or the other.
EBITDA or seller's discretionary earnings?
Smaller companies where the owner does the main job are often valued on seller's discretionary earnings (SDE): EBITDA plus the owner's full pay and benefits, because the buyer may step into that role personally. Once a company has a management team, or the buyer will hire someone to do the owner's job, adjusted EBITDA with a market salary for that role deducted is the right measure.
Many companies at the lower end of this market sit near the line between the two. Mixing them, for example applying an EBITDA-level multiple to SDE, overstates value, and experienced buyers will catch it quickly. Getting this choice right is often worth more than debating the multiple.
When discounted cash flow and asset values matter
A discounted cash flow model earns its place when the future will clearly differ from the past: a signed multi-year contract, a new production line coming online, or a known customer loss. It is very sensitive to its assumptions, so small changes in the growth rate or the discount rate move the answer a great deal. That is why it is rarely the lead method for a private company of this size.
The asset approach sets a floor. If a manufacturer's equipment and inventory are worth more than an earnings-based value, that says something about how profitable the business is. Manufacturing and distribution owners should know both numbers before they talk to buyers. When the asset value is close to or above the earnings value, the conversation with buyers shifts from what the company earns to what it would cost to replace.
What moves the multiple within the range
Notice that none of these is a formula. Two appraisers using the same method can still disagree by a full turn of multiple if they weigh these factors differently. That is why the best valuation for a company you plan to sell explains its choice of multiple in terms a buyer would accept, and why the final test is always the offers that competing buyers actually make.
- Size and consistency of earnings across at least three years
- How much revenue repeats through contracts, service agreements or long-standing accounts
- Customer concentration
- Depth of management and how much the company depends on the owner
- Margins compared with similar companies
- Growth trend and room for a new owner to grow
- Quality and reliability of the financial records
How we value companies at MDR & Associates
Our free opinion of value reviews three years of your financials, adjusts earnings the way a buyer would, applies market multiples suited to your size and industry, and checks the result against the other approaches where they matter. When an owner needs a formal written report for a lender, a partner or an estate plan, our business valuation service provides one as a separate, optional engagement. More on the value drivers is in what is my business worth. For a quick first read, start with the free valuation snapshot.
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