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What drives middle market valuation multiples?

ADVISORY BLOG | JAMES THOMPSON, MANAGING DIR. | OCT. 2021

As we continue our fourth decade (Alexander Hutton was started in 1986) representing successful private companies, their boards and shareholders, we are always asked, “how much is my business worth?” Of course, the answer to that question is always “whatever the market will bear” but there is a key difference between “valuation” and “worth” and key drivers of each. Valuation is general while worth is specific. Our job is to find the right buyer for the next period of growth, one for whom our client’s company is worth more, that pays the best price, on the best terms and with the best cultural fit.


The difference between valuation and worth, is to focus on the right buyer that can take the newly acquired company and maximize its true potential. Often a transaction is struck somewhere between the value of the company as it is and what it is worth synergistically to the acquirer. However, only in a competitive process does the buyer agree to share with the seller, those “synergies” that are achieved. If in fact 1+1 = 3, each side should get 1.5 in a perfect world. For a competent M&A advisor this should be the floor in negotiations. The ability to drive significantly higher valuations is predicated on the fundamentals of the business, including the durability of the business and strength of the management team and if the process involves multiple bidders.

Other drivers of “worth” include large addressable markets, strong management teams, high gross or operating margins (suggesting pricing power), intellectual property (brands/patents) and investment in scalable business processes. The larger the “moat” around your business, the higher the valuation multiple.


We recently represented several homes services businesses, one in the Puget Sound (Southwest Plumbing) and one in Missoula, Montana (DaySpring Restoration). We closed both of these transactions during COVID and with the nation in lock-down, the home services industry thrived. Each of these transactions had strong management teams, great local brands and growing end markets. What drove the best outcome in both cases were that there were multiple bidders at the table and through a competitive process, maximum value was achieved for both sellers.


While the value of one’s business is indeed driven by how the market reacts to the story, almost always those with the widest moats achieve the highest multiples. When business owners are considering questions on these matters, our senior team members at Alexander Hutton are always pleased to meet and discuss the important variables to be considered in the potential sale of all or part of a company. With over 215 completed transactions, we are ideally suited to assist. We welcome the opportunity to be of help.

Scott Hardman James Thompson Kent Johnson Stephen Humphreys

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