Valuation methods for businesses in Mexico: when to use each

The right valuation method depends on the type of business, the quality of its finances, the buyer profile, and the purpose of the valuation; in the Mexican SME segment the most used is the normalized EBITDA multiple. Using the wrong method does not produce a wrong number — it produces a number that does not reflect the reality of the business or the market where it will transact.

There are businesses where EBITDA is not the right metric — where the owner is the operation, where margins are artificially low, where value is in assets, or where future flow is predictable and different from history.

The sections below develop the six most used methods in Mexican SME transactions: when each applies, when it does not, and how they relate to each other.

What is the EBITDA multiple and when does it apply?

The EBITDA multiple is the reference method in Mexican SME transactions. Enterprise value is expressed as a multiple of normalized EBITDA: EV = normalized EBITDA × multiple.

When it applies:
Profitable businesses with at least two years of positive, stable EBITDA. Service companies, distribution, light manufacturing, and any business where operating margins are representative of cash-generation capacity.

Multiple range in Mexican SMEs:
Between 3x and 6x normalized EBITDA. Factors that push the multiple up:

• Recurring revenue
• Customer diversification
• Institutional management
• Sustained growth

Factors that push it down:

• Customer concentration
• Owner dependence
• Sector in contraction
• Informal finances

More in EBITDA multiple.

When it does not apply:
Businesses with negative or artificially depressed EBITDA. Businesses where owner salary distorts EBITDA so the multiple does not reflect real value. Businesses whose value is in assets, not operating flow.

Normalization is essential:
The EBITDA multiple only works on normalized EBITDA — not on reported EBITDA from financial statements. Without normalization, the buyer makes their own adjustments conservatively. More in normalized EBITDA.

What is SDE and when to use it?

SDE is the appropriate method for small businesses where the owner works actively in the operation and their total compensation — salary, benefits, mixed personal expenses — is the real return of the business.

When it applies:
Businesses with revenue under MXN $30M where the owner is the main operator. Restaurants, retail, personal professional services, single-location businesses. Any business where replacing the owner would require hiring someone at market salary who would consume much of EBITDA.

Difference from EBITDA:
In a business where the owner pays themselves MXN $600,000 a year when the market would pay MXN $1,800,000 for an equivalent, EBITDA is inflated by MXN $1,200,000 that is really replacement cost. SDE captures the total return of the owner-operator. The multiple on SDE is typically lower than on normalized EBITDA — between 2x and 4x — because risk is higher.

When it does not apply:
Businesses with institutional management where the owner is not the main operator. Mid-size companies with an independent management team.

When is the revenue multiple used?

When EBITDA is negative, artificially low, or not representative of business potential, the revenue multiple is the reference method.

When it applies:
Growth-stage businesses with temporarily low margins from reinvestment. SaaS or subscription businesses where value is in ARR (annual recurring revenue). Turnaround businesses where the buyer is acquiring potential, not history. Any case where comparing revenue to market peers is more informative than comparing EBITDA.

Typical ranges:

Ranges vary significantly by sector and growth profile.

When it does not apply:
Mature businesses with stable EBITDA where the revenue multiple would produce a valuation disconnected from real cash flow. A business with MXN $50M revenue and MXN $2M EBITDA valued at 1x revenue implies a 25x EBITDA multiple — which does not reflect what any rational buyer would pay.

When to use DCF (discounted cash flow)?

The DCF values a business as the present value of its future cash flows discounted at a rate that reflects risk. It is the theoretically most rigorous method and the most sensitive to assumptions.

When it applies:
Businesses with long-term contracts that make future flows predictable. Infrastructure, concessions, businesses with contractual revenue. Investment projects where history does not exist but future flow is defined. As a sanity check against the EBITDA multiple in transactions where the buyer wants to validate that the price implies a reasonable return.

The problem in SMEs:
DCF is extremely sensitive to discount rate and terminal growth rate. In Mexican SMEs — where historical flows are volatile, financial information is informal, and risk is hard to quantify — small changes in assumptions produce wide valuation ranges that do not help close a deal. It is used more as a reference than as the primary method. More in DCF.

How to use it well:
Model three scenarios (conservative, base, optimistic) with explicit assumptions. Use the resulting range to validate the EBITDA multiple, not as the definitive number.

When does the P/E (price/earnings) multiple apply?

The price/earnings multiple is the standard method in public markets. In private SME M&A its use is limited but relevant in specific contexts.

When it applies:
When the buyer is a fund or financial investor benchmarking against public alternatives. When the tax structure makes net income more representative than EBITDA. When comparing transactions to public companies in the same sector to establish a reference range.

Limitations in SMEs:
Net income in Mexican SMEs is often distorted by tax decisions — accelerated depreciation, compensation structures, income deferral. Normalized EBITDA is usually more representative of cash-generation capacity than reported net income.

When is book value or asset valuation used?

When the value of the business is in its assets — not in its ability to generate operating flow — the correct method is business valuation.

When it applies:
Businesses with significant assets whose market value exceeds the capitalized value of operating flow. Manufacturing with specialized equipment, businesses with owned real estate, distributors with valuable inventory. Businesses in wind-down where assets are liquidated, not sold as a going concern. Cases where the buyer is acquiring specific assets, not the full operation — a carve-out.

When it does not apply:
Service businesses where value is in relationships, team, or brand — intangibles that do not appear on the balance sheet. A services company with MXN $500,000 in fixed assets and MXN $3M EBITDA is not worth MXN $500,000.

How to choose the right method?

The decision is not exclusive — the best analysis uses multiple methods for cross-validation. The process:

1. Identify the type of business. Is it profitable and stable? → EBITDA. Is the owner the operation? → SDE. Does it have significant assets? → Assets as floor. Predictable future flows? → DCF as sanity check.
2. Normalize first. Any earnings-based method requires normalization. Without clean EBITDA or SDE, the multiple has no basis.
3. Use the range, not the point. No method produces an exact number. The result is a defensible valuation range — closing price is negotiated within that range according to bargaining power, deal structure, and market conditions.
4. The method the buyer uses drives the negotiation. If the seller comes with an EBITDA multiple and the buyer uses DCF, they are speaking different languages. Understanding the buyer’s method before negotiating is part of preparation.

What do buyers and sellers ask about valuation methods?

What valuation method is used most in Mexico for SMEs?

The normalized EBITDA multiple is the dominant method in Mexican SME transactions between USD $1.5M and $30M enterprise value. Typical multiples range from 3x to 6x depending on sector, customer concentration, owner dependence, and growth profile.

When does it make sense to use SDE instead of EBITDA?

When the owner works actively in the business and their total compensation — salary, benefits, personal expenses — is the real return from operations. If replacing the owner would cost more than what is currently paid, EBITDA is inflated and SDE is more representative.

Is DCF used in SME transactions?

Rarely as the primary method. It is used to validate the EBITDA multiple or in businesses with long-term contracts that make future flows predictable. Sensitivity to assumptions makes it impractical as the sole method in SMEs where historical information is limited.

What if the business has negative EBITDA?

If EBITDA is negative or not representative of potential, the revenue multiple is the most useful reference. If value is in assets, use asset valuation. If value is in future flows (turnaround, concession, long contract), use DCF with explicit scenarios.