Multiple Compression: Why Some Industries Are Getting Cheaper to Buy Right Now#
The federal funds rate climbed from near zero to over 5% between 2022 and 2023, the fastest tightening cycle in decades. That single shift compressed valuation multiples across entire industries, and the effects are still working through the SMB market today.
What Multiple Compression Actually Means#
A valuation multiple (SDE or EBITDA times some factor) reflects how much buyers are willing to pay per dollar of earnings. When financing gets more expensive, buyers can afford to pay less for the same earnings stream, since more of their return has to cover debt service instead of profit. Rates went from near zero in 2021 to a peak above 5% by mid-2023, and multiples across most sectors moved down with them.
Which Industries Are Feeling It Hardest Right Now#
Businesses that lean on financing-heavy buyers, like IT services and managed service providers, have seen multiples pull back roughly one to two turns from 2021 peaks, with the businesses lacking recurring revenue or differentiated services hit hardest.
Sectors tied closely to consumer discretionary spending have softened as buyer interest cools, even where deal volume hasn't dropped sharply.
Meanwhile, industries with strong recurring revenue, high documentation quality, or specialized end markets have held their multiples far better, since buyers can underwrite that predictability even in a tighter financing environment.
How to Think About It, Buyer or Seller#
If you're selling into a compressed multiple environment, differentiation matters more than ever. Recurring revenue, clean books, and low customer concentration all defend a multiple even when the broader market is soft.
If you're buying, compression can work in your favor. Rates have started easing off their peak, and businesses priced during the trough can represent real value if the underlying fundamentals are sound.
Don't anchor to a multiple you saw in a 2021 case study. Ask what similar businesses are actually trading at today, in your specific industry and size range, not the market overall.
Watch the rate environment as a leading indicator. Multiple compression and expansion tend to lag interest rate moves by several months, so a rate cut today often shows up in pricing later in the year.
Where Openfair Fits#
Openfair's team tracks current multiples across the industries active on the platform, so sellers price realistically and buyers know what a fair offer looks like in today's market, not last year's.
Getting This Right Early#
Multiple compression isn't permanent, and it isn't uniform. Knowing where your industry sits right now is worth more than any general market headline.
FAQ#
Does multiple compression mean my business is worth less than a year ago? Not necessarily. Compression affects the multiple applied to earnings, but if your earnings have grown, the two effects can offset each other partially or fully.
Which industries have held up best? Businesses with high recurring revenue, strong documentation, and specialized or less commoditized services have generally defended their multiples better than generalist or project-based businesses.
Is now a bad time to sell? It depends heavily on your specific industry and business quality. A well-documented, differentiated business in a resilient sector can still command a strong multiple even in a compressed overall market.
How long does multiple compression usually last? It tracks the broader rate cycle, historically taking one to two years to meaningfully recover after rates stabilize or begin easing, though this varies by industry.