How are companies valued in small and mid-market M&A?

A manufacturer with a specialised machine fleet, a technology company with its own IP, a SaaS business, or a services firm can each need a completely different valuation approach. A financial investor sees the same business differently to an industry buyer who, through the acquisition, gains technology, clients, capability, or several years’ head start into a new market.

Professional business valuation recognises three basic approaches: market, income and cost. In transaction practice they aren’t competing methods – they’re often used in parallel to view a company’s value from different angles.

Multiple-based valuation – the most common M&A starting point

For profitable companies, multiple-based valuation is one of the basic tools. The most common are EV/EBITDA, EV/EBIT and EV/Revenue. The right metric depends on the nature of the business – a mature manufacturing or services company is analysed mainly through EV/EBITDA, while a fast-growing SaaS business may lean more on EV/Revenue or an ARR multiple, especially if it hasn’t yet reached target profitability.

Normalised EBITDA of PLN 5m × a 6x multiple = PLN 30m Enterprise Value.

The problem is that a 6x multiple doesn’t exist in a vacuum. It’s shaped by things including:

• growth rate, profitability and revenue predictability
• the share of recurring revenue and customer concentration
• owner dependence and management quality
• competitive position, investment needs and working capital
• company scale, sector and the state of the deal market

That’s why two companies with PLN 5m of EBITDA each can be worth completely different amounts.

Where does the multiple come from?

One of the most important reference points is real transactions involving comparable companies – analysed by sector, business model, scale, growth rate, profitability, geography, client structure, revenue type and deal timing.

Listed comparables can also be used, but this needs particular care in small and mid-market deals. A listed company usually has greater scale, liquidity, more developed organisational structures, better access to financing, and a more diversified client base. Applying a large listed peer’s multiple to a private company without proper adjustment can lead to very optimistic results – a similar sector doesn’t automatically mean a comparable company.

Before applying a multiple – EBITDA normalisation

Just as important as the multiple itself is deciding which EBITDA it applies to. In owner-run companies, the financial result often needs normalising. Adjustments can cover one-off costs, owner expenses unrelated to operations, below-market owner compensation, dispute or restructuring costs, and one-off revenue and costs that won’t recur after the deal.

If reported EBITDA is PLN 4.5m but the normalised result after adjustments is PLN 5m, the gap at a 6x multiple is PLN 3m of Enterprise Value.

Before starting a sale process, it pays to know not just how much the company earned, but what level of result an investor will treat as recurring.

DCF – what are future cash flows worth?

The second basic approach is the income approach, and one of its most common methods is DCF – Discounted Cash Flow. Value comes from future cash flows discounted to present value. Economically, this is intuitive: a business is worth the economic benefits its owner can extract from it in the future.

The problem lies in the assumptions. Even a relatively small change in growth rate, margin, investment needs, discount rate, or terminal value can materially shift the result. In small and mid-market deals, DCF often works well as a tool for checking whether a multiple-based value is economically justified – it shouldn’t always be treated as the one, indisputable answer to the price question, though.

A manufacturing company – EBITDA may not show the full value

Companies with significant operating assets need particular attention – a specialised production line, proprietary automation, tooling, energy infrastructure, a lab, proprietary process technology, or client-required certifications.

EBITDA of PLN 6m × a 5x multiple = PLN 30m EV. But what if rebuilding a comparable plant would cost PLN 40m today?

In that case, an investor should also look at asset value and the cost of acquiring comparable production capacity.

Book value, adjusted assets, and replacement value

The simplest reference point in the asset approach is net asset value from the balance sheet, but in an M&A deal it often has limited relevance. A machine can be almost fully depreciated on the books yet still hold significant economic value – another can carry high book value while being technologically obsolete. Adjusted Net Asset Value – restating individual assets and liabilities to better reflect their true economic value – tends to be more useful.

Replacement value offers yet another perspective – what it would cost today to acquire an asset or business with comparable functionality. The cost approach rests on the principle that a rational buyer shouldn’t pay more for an asset than the cost of acquiring one of similar utility, unless time, risk or difficulty of execution also matter.

Rebuilding a factory isn’t just buying machines

The cost of rebuilding a plant shouldn’t be equated with just the purchase price of its core assets. It can also include transport and installation, line integration, automation, tooling, auxiliary systems, commissioning, testing, certification, reaching the right quality and yield, recruiting and training the team, and process know-how.

That doesn’t mean the company is automatically worth what building a new factory would cost, though. You still need to ask whether the assets held can generate a return matching their value. A plant that would cost PLN 50m to rebuild but generates only PLN 1m of EBITDA with no real growth prospects doesn’t have to be worth PLN 50m.

What if the most important asset is technology?

The same logic applies to technology and intellectual property – looking at both replacement cost (acquiring a solution of comparable utility) and reproduction cost (building a solution with the same features). Particular caution is needed, though: the cost of developing a solution isn’t the same as its value. You can spend PLN 20m on R&D and build a technology that finds no market, or create a solution with relatively little spend that generates very high cash flows for years.

The cost approach doesn’t directly capture future economic benefits from IP – the market for the technology, commercialisation potential, the user’s capability, access to sales channels, and time-to-market all matter too. Replacement cost is an important reference point, then, but not an automatic price for the technology.

Time to market – the value of time for an industry investor

For a strategic investor, the value of an acquisition can come from more than the target’s current cash flows. A significant part of the value can be the time the buyer saves compared with building similar capability, technology, or production capacity on its own – especially in technology and industrial sectors. Acquisitions are used precisely as a tool for quickly building new capability and scaling new business areas.

The value of that gap can include not just avoided CAPEX or R&D spend, but also:

• revenue and margin lost during the build period
• technology-failure risk and team hiring costs
• certification costs and time to qualify with clients
• time needed to reach stable quality and production
• the risk that a competitor takes the market meanwhile

For this reason, a company’s strategic value to a specific buyer can exceed its standalone value from an EBITDA multiple or classic DCF.

How much could time to market be worth?

For a specific investor, the gap can be justified by the value of time, avoided costs, reduced risk, faster market entry, and immediate client access. Here, valuation stops being purely an analysis of the target’s historical performance – it becomes an analysis of the buyer’s own alternatives too.

Why might a strategic investor pay more?

This leads to one of M&A’s most important rules: a company’s value isn’t always the same for every buyer.

Synergies can materially affect a deal’s economic value, but need a realistic estimate – assumptions about revenue synergies or margin gains should be tested with real caution.

A good sale process shouldn’t stop at “what’s the EBITDA multiple in our industry?” It also needs to establish for which investors our assets, technology, clients or market position might carry above-average strategic value – which is exactly why choosing the right buyer universe can matter as much for price as the financial valuation itself.

Enterprise Value still isn’t the price for the shares

Whatever method is used, Enterprise Value and Equity Value need to be distinguished. If normalised EBITDA is PLN 5m and the multiple is 6x, Enterprise Value is PLN 30m. But if the company holds PLN 4m of debt and PLN 1m of cash, its net debt is PLN 3m.

PLN 30m EV − PLN 3m net debt = PLN 27m Equity Value.

On top of that can come working capital adjustments, debt-like items, and other agreed price adjustments. Agreeing a multiple, then, still doesn’t mean agreeing the amount the owner will receive at closing.

Valuation vs. transaction price

This is the most important distinction of all. Valuation is an analysis of value. Price is the outcome of a specific transaction process. The final price can be shaped by the number of interested investors and their strategic motivations, competition among them, deal timing, market conditions, synergies, financing method, payment structure, an earn-out or rollover, and the level of debt and working capital.

That’s why one company can receive an offer worth 5.5x EBITDA from a financial investor and 7x EBITDA from a strategic one – and both offers can be economically rational.

So how are companies valued in small and mid-market M&A?

There’s no single formula that mechanically determines a company’s value. A good value analysis shouldn’t answer only “how many times EBITDA?”

It should also answer: what is the investor actually buying, and what would it cost them to achieve the same outcome another way?

This matters especially in small and mid-market M&A, where a large share of a company’s value can sit outside the P&L entirely – in client relationships, technology, know-how, certifications, the team, the machine fleet, or the time a competitor would need to rebuild a similar business.