A buy-and-build strategy runs on a price gap that is real and sourced, but not simply “buy low, sell high.” Part of it is a genuinely different earnings measure.
Key takeaways
A sponsor running a buy-and-build programme is underwriting two different valuations at once: the price paid for each add-on, and the price the assembled platform is expected to command once it has scale, a management layer and audited numbers behind it. The gap between those two prices is the entire economic case for the strategy — and it survives diligence only if the fund can say precisely where the gap comes from, rather than treating “buy small, sell big” as self-evidently true of any acquisition folded into a larger one.
The first place the gap comes from is not the multiple at all — it is the number the multiple is applied to. Deavo’s own guidance on the two methods is direct: SDE “starts from a business’s pre-tax profit and adds back interest, one owner’s compensation” and other addbacks, while EBITDA “does not add back owner compensation in the same way, on the assumption that the business already pays, or would need to pay, a market wage to whoever runs it, whether that is the owner or a hired manager.” The same source states the conclusion plainly: “A multiple applied to SDE is not directly comparable to a multiple applied to EBITDA for the same business,” and converting one into the other is “imprecise and should be treated as” an approximation, not an equivalence.
That matters directly for a roll-up. A small add-on priced on SDE already treats the owner’s personal compensation as cash available to a buyer. Once that business is folded into a platform and the owner’s role is replaced with a market-rate manager, part of what used to be SDE becomes a real operating cost the platform now carries. Some of the visible multiple expansion between acquisition and exit is therefore not free value creation at all — it is the platform absorbing a cost the SDE-basis price never charged the buyer for.
Deavo’s capital-stack page is the only Canadian source this hub has found that lays out pricing context by deal size on one page, and it carries the standard disclaimer that the figures are “illustrative” and not a valuation opinion. On a micro deal, roughly $200,000 to $1 million, it describes pricing context as “often ~2–3×” of SDE. On a small deal, $1 million to $5 million, pricing shifts to EBITDA, “often ~3–5×.” At mid-market scale, $5 million to $30 million, the same page states enterprise value is “typically ~6–8× EBITDA.” Deavo’s median SDE multiples by sector on its valuation tool run from 2.1× for restaurants to 3.6× for manufacturing, each labelled an “illustrative benchmark range” for research context, not an appraisal.
The same page names what moves a target off its sector median in either direction: “growth trend, profit trend, years established, owner-dependence” — “the same factors buyers weigh.” A small, owner-dependent add-on is priced down on exactly the factor a platform is built to remove, which is part of why the gap between an add-on’s price and the platform’s value is not an anomaly — it is priced into the add-on from the start.
A buyer cannot pay more for a micro-scale add-on than a lender will underwrite, and the Canada Small Business Financing Program (CSBFP) is the financing most micro deals in this band actually use. ISED’s own programme page states the maximum loan amount for a borrower is “$1.15 million,” and its FAQ is unambiguous that the programme “cannot [be used] to finance items such as share purchases or assets that a holding company acquires.” That caps the loan-financed portion of a micro add-on’s price at a fixed dollar ceiling, and it rules the programme out entirely once the deal is structured as a share purchase or run through a holding company — which most platform-and-subsidiary structures are. See the guide to applying for CSBFP funding for the eligibility mechanics.
Deavo’s own DSCR bands reinforce the same ceiling from the debt-service side: lenders underwrite a micro deal at a target debt-service coverage ratio of “≥ 1.25× on SDE,” rising to “≥ 1.30× on EBITDA” once a deal moves into the small-deal band. A price a lender will not clear on those terms simply does not finance, whatever the seller’s asking multiple happens to be — a hard, mechanical reason small deals trade in a narrower and lower band than a platform’s eventual sale price.
It is tempting to add Competition Act merger notification to the list of reasons small deals price cheaper, since a notifiable transaction carries real legal cost and a mandatory waiting period. In practice it is not the driver for most of this hub’s readers: the party-size test in s.109(1) is triggered only where the buyer and its affiliates together have assets in Canada or Canada-sourced revenue exceeding $400 million, and the transaction-size test in s.110 was enacted at $70 million (the current-year figure is published annually and should be confirmed with the Competition Bureau, not assumed). Both an SME add-on and most of the platforms built to acquire them sit well under those figures. The one place this changes is a mature roll-up whose own aggregate size — assets and revenue across the whole affiliated group, not the add-on alone — starts to approach the party-size threshold; at that point a deal that would never have been notifiable on its own can become notifiable because of who is buying it.
A fund is evaluating a trades-sector add-on with $400,000 of SDE. Applying deavo’s published trades median of 2.9× — an illustrative benchmark, not an appraisal — gives an indicative midpoint of $1,160,000 (400,000 × 2.9). Three years and two further add-ons later, the assembled platform reports normalized EBITDA of $2,100,000, with an owner-operator manager now in place of each founder who sold in. Applying deavo’s mid-market range of roughly 6–8× EBITDA gives an indicative enterprise value of $12,600,000 to $16,800,000 (2,100,000 × 6, and × 8).
The gap between $1,160,000 and that range looks like pure multiple arbitrage. It is not. Part of the platform’s $2,100,000 of EBITDA is the same underlying cash flow the original $400,000 of SDE represented, now reduced by the market-rate salary that replaced the founder’s owner compensation. The rest is a genuine re-rating: three revenue streams instead of one, audited consolidated numbers instead of a set of books, and a management team the platform can sell without the founder walking out the door. A fund that presents the whole gap as multiple arbitrage, without separating the earnings-basis effect from the re-rating, is overstating what the strategy actually captures.
Not entirely. Deavo’s own guidance treats SDE and EBITDA as non-comparable earnings bases, so part of the gap between an add-on’s SDE-based price and a platform’s EBITDA-based value is the platform absorbing a market-rate management cost the SDE price never charged for. The remainder is a real re-rating for scale, diversification and audited reporting -- but the two effects should be separated, not presented as one number.
Usually not. The party-size test in s.109(1) applies only above $400 million in Canadian assets or revenue across the buyer and its affiliates, and the transaction-size test in s.110 was enacted at $70 million. Most SME add-ons, and most of the platforms buying them, sit well under both. It becomes a live question only once a roll-up's own aggregate group size approaches those figures.
Because it caps what a lender will put behind a micro-scale deal at a $1.15 million loan maximum and rules the programme out entirely for a share purchase or a holding-company acquisition. A price a participating lender will not underwrite on those terms and the programme's DSCR bands does not close on that financing, regardless of what a seller is asking.
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