How are Lower Middle Market Companies Valued?

There are four primary ways middle-market companies are valued: 

(1) comparable companies analysis, which uses stock trading prices for public companies discounted for the size of the selling company; 

(2) discount cash flow (DCF) analysis based on projections, 

(3) asset-based valuation based on book-value, and 

(4) precedent transactions for the multiple of earnings method.

The precedent transaction method, also known as "comparable transactions" or "transaction comps," is the most widely used and discussed model for lower middle market transactions.

It’s a valuation approach that involves analyzing the prices paid in past transactions of similar companies to determine the value of the company being assessed.

After identifying comparable transactions and gathering associated data, you determine the multiple range and median, typically expressed as a multiple of adjusted EBITDA.