The million-dollar mark in earnings before interest, taxes, depreciation, and amortization (EBITDA) is a tipping point at which the number of buyers interested in acquiring your business goes up dramatically. The more interested buyers you have, the better multiple of earnings you will command.

Since businesses are often valued on a multiple of earnings, getting to a million in profits means you’re not only getting a higher multiple but also applying your multiple to a higher number.

For example, according to research by the folks at the Sellability Score, a company with $200,000 in EBITDA might be lucky to fetch three times EBITDA, or $600,000. A company with a million dollars in EBITDA would likely command five times that figure, or $5 million. So the company with $1 million in EBITDA is five times bigger than the $200,000 company, but almost 10 times more valuable.

There are a number of reasons that offer multiples go up with company size, including:

1. Transaction Costs

It costs about the same in legal and banking fees to buy a company for $600,000 as it does to buy a company for $5 million. In large deals, these “transactional costs” become a rounding error, but they amount to a punitive tax on smaller deals.

2. The 5-20 Rule (too big to swallow-too small to move the needle)

Todd Taskey who runs an M&A firm in the Washington, D.C. area discovered that, in many of the deals he does, the acquiring company is between 5 and 20 times the size of the target company.

If an acquiring business is less than 5 times your size, your company may become too big to swallow for the acquirer: If the acquisition fails, it will likely kill the acquiring company. 

Likewise, if the acquirer is more than 20 times the size of your business, the acquirer will not enjoy a meaningful lift to its revenue by buying you. Most big, mature companies aspire for 5 to 20 percent top-line revenue growth at a minimum. If they can’t move the top line by at least 5 percent (with a high growth potential) through the acquisition, the transaction is not likely to happen because it will be considered too small to move the needle. 

3. Private Equity

Private Equity Groups (PEGs) make up a large chunk of the acquirers in the mid market. The value of your company will move up considerably if you’re able to get a few PEGs interested in buying your business. But most PEGs are looking for companies with at least $1 million in EBITDA. The million-dollar cut-off is somewhat arbitrary, but very common. As with homebuyers who narrow their house search to houses that fit within a price range, or colleges that look for a minimum SAT score, if you don’t fit the minimum criteria, you may not be considered.

If you’re close to a million dollars in EBITDA and getting antsy to sell, you may want to hold off until your profits eclipse the million-dollar threshold, because the universe of buyers—and the multiple those buyers are willing to offer—jumps nicely once you reach seven figures.

Interested in knowing if your business is sellable? Why guess when you can know?  In just 13 minutes, The Sellability Score provides you with the overall insights you need to build a much more valuable asset that you can sell in the future while providing you with more time and less anxiety.