Private SMEs are harder to sell than listed shares: the buyer pool is smaller, the diligence process longer, the information asymmetry higher, and the financing more complex. These frictions are captured in two overlapping adjustments: a size discount (small businesses trade at lower multiples than large ones) and an illiquidity premium on the discount rate (higher WACC for private companies vs. listed comparables).
The size discount is particularly pronounced at the lower end of the mid-market. Academic research and transaction databases consistently show: businesses with EBITDA below €1m trade at 2–3× below sector medians; €1–2m EBITDA trades 1–2× below; €2–5m trades at or slightly below the median; €5–15m starts to achieve full sector multiple; above €15m, a size premium may apply as PE fund appetite increases.
Sellers can partially mitigate the SME discount by: increasing EBITDA above key thresholds (€2m, €5m), reducing key-person dependency, building recurring revenue, and creating a competitive buyer process. The gap between what a €1m EBITDA business trades for (perhaps 5×) versus a €5m EBITDA business in the same sector (perhaps 9×) is not just size — it is the entire quality profile that changes as a business scales.
Size premium/discount in practice
Sector: business services. Argos sector median: 9.2×. Business A (EBITDA: €800k): size discount −2×, effective multiple ~7.2×, EV = €5.8m. Business B (EBITDA: €3m): size discount −0.5×, effective multiple ~8.7×, EV = €26.1m. Business C (EBITDA: €8m): at or above median, effective multiple ~9.5×, EV = €76m. B4 times the EBITDA of A yields 4.5× the enterprise value — because the multiple expands with scale.
Frequently asked questions
Why do small businesses trade at lower multiples than large ones?
Smaller businesses carry higher concentration risk (one founder, one key client, one product), are harder to finance (banks and PE funds have minimum deal sizes), attract a smaller buyer pool, and carry higher key-person dependency. The discount compensates buyers for these risks. Crossing EBITDA thresholds (€1m, €2m, €5m) unlocks meaningfully different buyer segments.
Is there anything sellers can do to reduce the size discount?
Yes: three approaches have the most impact. First, increase EBITDA to cross a threshold — even modest organic growth from €900k to €1.1m EBITDA can shift the applicable multiple by 1–1.5×. Second, reduce key-person dependency through management hires and process documentation. Third, demonstrate recurring revenue — subscription or contract-based income commands a quality premium that partially offsets the size discount.
How is the illiquidity discount different from the size discount?
The size discount operates on the multiple (a €1m EBITDA business sells for 7× instead of 9×). The illiquidity discount operates on the DCF discount rate (private companies warrant a higher WACC than listed comparables — typically +1–3%). Both reflect similar underlying dynamics but are expressed differently in the two valuation methodologies.