What Are the Valuation Trends for Independent Sponsors/Buyers Acquiring Lower Middle Market Companies? 

• Valuations continue to scale with size: the median earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple is 5.7x adjusted EBITDA for companies with $10 million to $25 million in enterprise value (EV), 7.6x for $25 million to $50 million, and 9.4x for $50 million to $200 million.
• Buyers commonly cite a "scarcity of quality targets" in the lower middle market.
• Price gains are concentrating in stronger, higher-margin companies rather than spreading evenly across the market.
  • Targets with above-industry-average profit margins can command almost one full EBITDA multiple more than targets with below-average margins.
• To address the valuation gap between buyers and sellers, "earnouts are functioning less as a concession and more as a core structuring tool in today's market."
• In today's earnout structure, earnouts average 16.5% of enterprise value and run a median of 24 months.
• Other investment bankers report that lower middle market buyers are holding back more cash at close and, in addition to rollover equity, using more earnouts and seller financing for business acquisitions (some with contingent payment structures).