Updated: August 06, 2026
Author: Calvin Hughes, Senior Partner
A business owner in Alberta once told me he’d figured out what his business was worth by taking his profit and multiplying it by the same factor he’d heard a buddy’s shop sold for. That number was wrong in three different ways before we even got to a buyer’s desk. Business valuation in the lower middle market isn’t a formula you look up. It’s a set of judgments, applied to your specific numbers, by someone who has seen enough deals to know where the soft spots are.
Why ‘a Multiple of EBITDA’ Is Only Half the Answer
Most owners have heard that businesses sell for some multiple of EBITDA, earnings before interest, taxes, depreciation, and amortization. That’s true as a starting point. In the lower middle market, meaning companies roughly in the $2 million to $50 million revenue range, EBITDA multiples for private, non-public companies typically fall somewhere between 3x and 7x, depending on industry, size, and risk profile. But the multiple is only one side of the equation. The other side is what EBITDA number you’re actually multiplying, and that number is rarely what shows up on your year-end financial statements.
The EBITDA multiple approach isn’t the only method in play, though it’s the one most owners have heard of. A market or comparable transactions approach looks at what similar businesses in your industry and size range have actually sold for, and it’s usually the anchor in a lower middle market deal because there’s enough transaction data to make it credible. A discounted cash flow approach, which projects future cash flows and discounts them back to a present value, tends to carry more weight for businesses with long-term contracts or highly predictable, growing cash flows, and less weight for businesses with lumpy or unpredictable earnings. An asset-based approach, which values the business on its net tangible assets rather than its earnings, matters most for asset-heavy businesses that aren’t generating much profit relative to their equipment or real estate, or for businesses being liquidated rather than sold as a going concern. In practice, a proper valuation triangulates across two or three of these methods rather than leaning on one in isolation.
How Normalized EBITDA Differs From Accounting EBITDA
Your accountant’s job is to minimize tax. A buyer’s job is to understand true cash-generating capacity. Those two goals produce different numbers. A Calgary-based mechanical contractor might run a family member’s truck payment through the business, pay themselves a salary well above or below market rate, or bury a one-time legal settlement in operating expenses. None of that reflects what the business would earn under new ownership with a market-rate management team in place.
Normalizing EBITDA means adding back or removing these items to get to a figure that represents ongoing, repeatable earnings. This is where a lot of value gets found, or lost. An owner who hasn’t gone through this exercise before a sale process often understates what the business actually earns, because they’ve spent years optimizing the books for CRA, not for a buyer. It’s also where inflated add-backs get challenged hardest in due diligence, so this has to be defensible, not aspirational.
What Drives Multiple Expansion and Compression
Once you have a normalized EBITDA figure, the multiple applied to it moves based on a handful of concrete factors. Customer concentration is one: a Lethbridge distributor with one customer at 40% of revenue will get a lower multiple than a comparable business with revenue spread across fifty accounts, because that concentration is a real risk to a buyer. Recurring revenue, management depth beyond the owner, growth trends, and industry tailwinds all push multiples up. Owner dependence, aging equipment, customer or supplier concentration, and cyclicality push multiples down.
Size matters too. A company doing $1 million in EBITDA typically trades at a lower multiple than one doing $8 million in EBITDA in the same industry, even if both are well run, because larger businesses are seen as less risky and attract a wider pool of buyers, including private equity groups that can’t write small enough cheques for the smaller deal.
An owner who hasn’t gone through this exercise before a sale process often understates what the business actually earns, because they’ve spent years optimizing the books for CRA, not for a buyer.
How Deal Structure Affects the Effective Valuation
The headline purchase price and the number you actually walk away with are not the same thing. If a buyer offers $6 million with $4.5 million cash at close and the remainder in an earn-out tied to hitting future revenue targets, that’s a very different deal than $6 million all cash at close, even though the sticker price looks identical. Holdbacks, vendor notes, working capital adjustments, and earn-outs all change the effective value and the risk you’re carrying after closing. A lower headline number with more cash certainty at close can be worth more to an owner than a higher number stretched out over three years of hoping the new owner hits targets you no longer control.
Why the Same Business Gets Different Numbers From Different Buyers
A strategic buyer, meaning a competitor or a company in an adjacent industry, might pay more than a financial buyer because they can eliminate duplicate overhead or cross-sell into your customer base. A private equity group building a platform in your sector might pay a premium because your business fills a specific gap in their existing portfolio. An individual buyer using a small business loan is often the most price-sensitive, because they’re personally on the hook for the debt and banks will only lend against a certain multiple of cash flow. This is why the same set of financials, presented to different buyer types, can generate offers that differ by 20% or more. Part of running a proper sale process is finding out which type of buyer values your specific business the most, rather than accepting the first offer that comes in.
What Paladin Does During a Valuation Engagement
When we work through a valuation with an owner, we start with three to five years of financial statements and rebuild EBITDA line by line, testing every add-back against what a buyer’s due diligence team would actually accept. We then benchmark against comparable transactions in Western Canada and the broader market for that industry and size range, adjusting for the specific risk factors in that business, whether that’s a concentrated customer base, an aging owner with no succession plan in place, or a niche that only a handful of buyers understand. The output isn’t a single number. It’s a range, tied to specific deal structures and buyer types, so an owner understands not just what the business might be worth, but why, and what levers could move that number before a sale process ever starts.
If you’re an owner in Alberta or elsewhere in Western Canada thinking about a sale in the next one to three years, the most useful thing you can do right now isn’t to guess at a multiple. It’s to get your normalized EBITDA right, understand which of your risk factors a buyer will flag first, and figure out how much of your reported profit is actually repeatable under new ownership. That’s the number that matters, long before anyone talks about a multiple.
If you are thinking about a sale and want to talk through what this means for your business, we are happy to have that conversation. Book a confidential strategy call with our partners.