Multiple arbitrage is the gain created when a buyer acquires small businesses at low valuation multiples, combines them, and later sells the larger entity at a higher multiple, value that comes from size and scale, not just earnings growth.
Worked example
| Stage | SDE / EBITDA | Multiple | Value |
|---|---|---|---|
| Buy 4 businesses (avg $250k) | $1,000,000 | 2.7× | $2,700,000 |
| Combine & operate as one | $1,000,000 | ||
| Sell the combined company | $1,000,000 | 5.0× | $5,000,000 |
| Arbitrage created | ~$2,300,000 |
Same $1M of earnings, the value jump comes purely from the higher multiple a bigger company commands.
Why it matters when buying a business
Multiple arbitrage is why the buy-and-build model works. Each bolt-on folded into your platform is bought cheap and re-rated at the group's higher multiple. The gain is real but not automatic, it depends on clean integration and a genuine step-up in buyer demand at exit.
