Understanding the Divide: Valuation Multiples for Small Businesses vs. Lower Middle Market

Valuation multiples can vary significantly between small businesses and those in the lower middle market (LMM). But what defines the line between the two? Let's dive in:

Typically, small businesses have revenues under $5 million, while LMM businesses range between $5 million and $150 million. But revenue alone doesn't tell the full story—market position is equally influenced by core business characteristics. Interestingly, some businesses with under $5 million in revenue operate like LMM firms, and vice versa. Here's how these two types of businesses often differ:

• Capital Management: LMM businesses focus on capital management, while small businesses often prioritize cash flow for immediate needs.

• Growth Goals: LMM firms work toward entity-level value creation, while small businesses may prioritize supporting the owner's lifestyle.

• Management Structure: LMM companies have distinct roles, while small business owners usually wear multiple hats.

• Capital Access: LMM businesses often rely on commercial banking, private equity, and boutique investment bankers, whereas small businesses lean on local banks, family equity, and business brokers.

The best part? Business owners can actively shape these characteristics, directly impacting valuation multiples.