The Hidden Game of Valuation: Nick Bradley on Multiple Arbitrage in M&A

In a recent LinkedIn post, Nick Bradley sheds light on a critical, often overlooked aspect of Mergers & Acquisitions (M&A) valuations, arguing that many advisors and business owners are focused on the wrong metrics. Bradley contends that the key to significant value creation isn’t just growing Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), but strategically positioning a business to benefit from ‘multiple arbitrage’.

The Illusion of Simple Growth

Bradley begins by challenging a common piece of advice given to business owners: that simply growing EBITDA will directly lead to a proportional increase in valuation. While acknowledging that EBITDA growth is indeed a factor, he asserts that this advice omits a more crucial element – the impact of valuation multiples and how they change based on a business’s tier or size.

“They’ll tell you ‘grow your EBITDA and your valuation will grow.’ That’s true. But it’s hiding the more important truth: how much your valuation grows depends on which multiple tier you’re in.”

This concept, which Bradley terms ‘multiple arbitrage,’ is presented as the real engine behind the outsized returns often seen from private equity (PE) firms. He suggests that PE firms are not necessarily superior operators but are adept at playing a different game that leverages valuation tiers.

Understanding Multiple Arbitrage

Bradley illustrates this with a stark comparison between a founder’s growth and a PE firm’s strategy. A founder might double their EBITDA from $1 million to $2 million, resulting in a doubling of their valuation from $3 million to $6 million – a $3 million increase in value, or $3 of value created per $1 of EBITDA growth.

In contrast, a PE firm might acquire a business with $5 million EBITDA at a 5x multiple ($25 million valuation). They then grow the EBITDA by a smaller percentage, say 40%, to $7 million. However, the critical move is shifting the business into a higher valuation tier, exiting at an 8x multiple for $56 million. This results in $31 million of value created – over five times more value per dollar of EBITDA growth than the founder achieved.

“The math that should piss you off: You (the founder): Grow EBITDA 100% ($1M → $2M). Valuation goes from $3M → $6M. Value created: $3M. Efficiency: $3 value per $1 of EBITDA growth. PE firm: Buys a $5M EBITDA business at 5x ($25M). Grows it just 40% to $7M EBITDA. But moves businesses from 3x to 8x multiples – and pocketing the difference.”

The disparity, Bradley emphasizes, comes from ‘manufacturing a multiple expansion.’ He points out that PE firms aggressively target specific EBITDA thresholds, such as $10 million or $20 million, because these often represent breakpoints that unlock significantly higher multiples.

The Power of Thresholds

Crossing these EBITDA thresholds, according to Bradley, triggers a cascade of benefits:

• Access to different, often larger, buyer pools.
• Increased interest from institutional capital.
• Greater attention from strategic acquirers.
• More favorable debt terms and accessibility.
• An immediate jump in valuation multiples, potentially 2-3x.

Bradley highlights the frustration for founders when PE firms acquire smaller companies, consolidate them, and then sell the larger entity at a substantially higher multiple. This ‘engineered scale’ is the essence of their arbitrage strategy, even if the underlying operations, margins, and industry remain the same.

“PE firms are doing this with YOUR type of business right now. Buying 3-5 companies at 4x, bolting them together, and flipping the platform at 9x.”

Reframing the Founder’s Focus

The core of Bradley’s message is a call for founders to re-evaluate their strategic priorities. Instead of solely focusing on marginal operational improvements or squeezing out extra points of margin, he urges them to concentrate on achieving the scale necessary to trigger multiple expansion.

He poses a pointed question to founders currently in the $3 million to $8 million EBITDA range: Are they building a business that will capture its own value appreciation, or are they merely preparing a more attractive asset for a future PE acquisition?

“If you’re sitting at $3M-8M EBITDA right now, are you building a business… or are you just creating raw material for someone else’s arbitrage play?”

Bradley concludes by framing the choice starkly: within three years, a founder will either be the one benefiting from multiple expansion or will be part of an acquisition that fuels someone else’s higher multiple exit. The critical question, he posits, is which side of the arbitrage they intend to be on.