How to Value an Acquisition Target: A Search Funder's Framework for Setting Your LOI Range

To value an acquisition target and set your LOI range, take the seller's normalized earnings (SDE for smaller businesses, EBITDA for larger ones), apply the multiple range that comparable middle-market deals are actually closing at, and then widen or tighten that multiple for the target's specific risk. The output should be a range (bear, base, and bull), not a single number, because you still have diligence ahead of you.

That is the whole framework in three sentences. The rest of this article is how to do each step well enough that your Letter of Intent survives due diligence and lender underwriting.

What Is an LOI Valuation Range?

An LOI valuation range is the price band a buyer commits to (subject to diligence) when submitting a Letter of Intent. It is not a precise appraisal: it is a defensible bracket that says "based on what I can see today, this business is worth between X and Y, and here's why." For search funders and ETA operators, getting this range right is the difference between an accepted LOI that closes and one that either gets you outbid or falls apart when the numbers don't hold.

Step 1: Normalize the Earnings First

You cannot value a business on the earnings the seller reports. You value it on the earnings a new owner will actually keep. That means normalizing:

• Add back owner perks, one-time expenses, and above-market owner compensation.
• Subtract the cost of replacing anything the seller did for free (a market-rate manager if the owner ran operations, for example).

Which metric you normalize to depends on size, and it matters. This is the difference between SDE and EBITDA:

• SDE (Seller's Discretionary Earnings) for owner-operated businesses, typically under ~$1M in earnings. It includes one owner's salary.
• EBITDA for larger businesses that already run on a management team. It does not addback owner salary because a manager is a real cost.

Getting this wrong is the most common ETA valuation error: applying an EBITDA multiple to an SDE figure (or vice versa) can misprice a deal by 30% or more.

Step 2: Anchor to Lower-Middle-Market Multiples

Once you have a clean earnings number, anchor the multiple to what comparable businesses are actually closing at, not to public-company multiples or headline SaaS numbers. Multiples rise with size, because larger businesses carry less key-person and customer-concentration risk. As a starting reference for privately held middle-market deals:

These are illustrative ranges, and they match the deal-size table in our business valuation multiples by industry reference, which also carries the sector tables. That reference places ETA and search fund buyers, typically SBA-financed, in the $500K to $1M SDE band. Always verify against current, source-cited data. The primary references professionals rely on are the IBBA & M&A Source Market Pulse report (quarterly, by size and sector), DealStats (formerly Pratt's Stats), and GF Data for the upper end of the lower-middle market. Sector matters enormously on top of size: a recurring-revenue software business and a project-based contractor at the same EBITDA will not command the same multiple. See how EBITDA multiples work by industry for the sector overlay.

Step 3: Adjust the Multiple for Risk

The table gives you a starting bracket. Where you land inside it (or below it) depends on the same risk factors sophisticated buyers scrutinize first:

• Customer concentration: one client above ~20% of revenue pulls the multiple down.
• Owner dependence: if the business can't run without the seller, you're buying a job; discount accordingly.
• Margin quality and trend: durable, above-sector margins push you toward the top of the range.
• Revenue durability: recurring or contracted revenue earns a premium; project or one-time revenue does not.

Each of these effectively raises your required return, which lowers the multiple you can justify.

Step 4: Set a Range, Not a Point

Express the result as three numbers so you preserve negotiating room and account for diligence risk:

• Bear: bottom of the multiple range, assuming diligence uncovers the concentration or owner-dependence risks you suspect.
• Base: your central estimate on normalized earnings and a sector-appropriate multiple.
• Bull: top of the range, only if diligence confirms clean books, a transferable team, and durable revenue.

Your LOI should anchor near the base, with the bear as your walk-away floor.

Step 5: Pressure-Test Against the Financing

For most ETA and search-fund deals, the valuation has to survive a lender, not just a spreadsheet. Under current SBA SOP 50 10 guidance, 7(a) acquisition loans generally require an independent business valuation once the financed goodwill exceeds a set threshold (commonly cited at $250,000). Confirm the current threshold and rules with your lender. Separately, the deal has to service its debt: lenders typically underwrite to a minimum debt-service-coverage ratio (often around 1.15×+). If your base-case price can't clear DSCR at realistic terms, the valuation is too high regardless of what the multiple table says.

How do search fund operators value acquisition targets?

Experienced search fund operators (and self-funded searchers) do not pick one method. They run three side by side, because each answers a different question. The market multiple tells you what the business is worth to the market. The returns model tells you what it is worth to you, given the debt you can raise and the return your investors expect. The asset floor tells you what is underneath the goodwill if the earnings do not hold. Steps 1 through 5 above are the market multiple done properly; this is how the other two fit around it.

The three rarely agree, and the disagreement is the point. When the returns model clears below the market multiple, the market is pricing the business for a buyer with cheaper capital than you, and the answer is to change the structure (a larger seller note, an earnout, seller financing on the terms that actually work) or to walk, not to stretch the multiple. When the asset floor sits close to the multiple answer, you are buying assets with a thin earnings premium, which is a very different risk from buying a goodwill-heavy services business. Your bear case should never sit below the asset floor, and your LOI range should sit where the market multiple and the returns model overlap.

Frequently Asked Questions

What multiple should I pay for a small business?

For owner-operated businesses under ~$1M in SDE, most privately held deals close between roughly 2x and 4x SDE (1.5x to 2.5x below $250K of SDE, rising to 2.5x to 4.0x at $500K to $1M); management-run businesses valued on EBITDA typically range from roughly 4x to 9x depending on size, sector, and risk. Anchor to current IBBA Market Pulse or DealStats data for your specific size and industry rather than a rule of thumb.

Should I value an acquisition target on SDE or EBITDA?

Use SDE for smaller, owner-operated businesses (it addbacks one owner's salary) and EBITDA for larger businesses that already run on a management team. Applying the wrong metric's multiple is one of the most common and expensive ETA valuation mistakes.

Does an SBA loan require a business valuation?

Generally yes for 7(a) acquisition loans once the financed goodwill exceeds the SBA's threshold. The valuation must be independent and performed by a qualified source. Because SBA SOP 50 10 is updated periodically, confirm the current requirements with your specific lender before relying on them.

What valuation methods should an ETA searcher use?

Three, run side by side: a market multiple on normalized SDE or EBITDA to see what comparable deals are clearing at, a returns model (an LBO built on your actual debt structure and target IRR) to see the most you can pay, and an asset floor to see what sits underneath the goodwill. A discounted cash flow is a reasonable cross-check on the same forecast the returns model uses, but the lender and the seller's advisor will both be talking in multiples, so that is the language the LOI has to be defensible in.

What is ETA acquisition valuation?

ETA (entrepreneurship through acquisition) valuation is how a searcher prices a business they intend to buy and run themselves: normalize the earnings, anchor to the lower-middle-market multiple band for the size, adjust for concentration, owner dependence, and revenue durability, then pressure-test the price against the financing. It differs from a seller's appraisal because it is constrained by the debt the business can service and the return the searcher's investors require, not only by what comparable deals closed at. The output is a bear, base, and bull range, not a single number.

Is a business valuation for a search fund different from a broker valuation?

Yes, in purpose and in constraints. A broker opinion of value is a sell-side pricing document: it sets an asking price, usually on the seller's own add-backs, and it is not independent. A business valuation for a search fund has to do three things a broker's number does not: survive diligence on those add-backs, satisfy the lender (SBA 7(a) acquisition loans generally require an independent valuation once financed goodwill exceeds the SBA threshold, commonly cited at $250,000), and clear the searcher's returns model. Treat the broker's figure as the seller's opening position, not as evidence of value.

What EBITDA multiple for an acquisition?

For a management-run business in the lower middle market, the deal-size bands in our multiples reference run 4.5x to 6.0x EBITDA at $1M to $3M of EBITDA and 5.5x to 7.0x at $3M to $5M, with sector, recurring revenue, and customer concentration moving a specific business inside its band. The band tells you what the market clears at; it does not tell you what you can pay. That ceiling comes from your own returns model: at a given debt structure and target IRR there is a price above which the deal stops working for your investors, and it can sit well below the top of the band. When it does, the fix is structure (a seller note, an earnout) or a pass, not a higher multiple.

Key Takeaways

• Normalize earnings first, and match the metric to size: SDE for owner-operated, EBITDA for management-run businesses.
• Anchor the multiple to real middle-market deal data (IBBA Market Pulse, DealStats), then adjust for concentration, owner dependence, and revenue durability.
• Set a bear/base/bull range, anchor your LOI near the base, and keep the bear as your walk-away floor.
• Pressure-test against financing: the price has to clear SBA valuation rules and debt-service coverage, not just your model.
• Run the market multiple, the returns model, and the asset floor side by side: the multiple says what the market clears at, the returns model says what you can pay, and the floor says what is underneath the goodwill.

Setting an LOI range is where most first-time search funders either overpay or lose the deal. ValueAlpha runs the same normalized-earnings, multiple-driven, risk-adjusted analysis lenders and sellers' advisors use, so you can walk into an LOI with a defensible number and the reasoning to back it up.