Most owners eventually hear a rule of thumb: Businesses like yours sell for X times earnings. That's useful—but incomplete.
A multiple is part of the valuation conversation. It isn't the entire conversation.
The earnings base
Start by understanding what the business earns.
Seller's Discretionary Earnings, or SDE, is commonly used to discuss the economic benefit available to one owner-operator. Conceptually, it begins with reported net profit and considers adjustments that may not continue for a buyer.
EBITDA is another earnings measure and is often more relevant for larger companies or transactions involving professional management and institutional buyers. The appropriate measure depends on company size, structure and buyer type.
The multiple
Earnings are the starting point—not the complete story.
Buyers interpret earnings through the risks and opportunities they expect to inherit. Growth and revenue trends, customer concentration, recurring revenue, margins, owner dependence, management, competitive position, capital requirements, documentation, transferability, industry conditions and buyer demand can all influence how a company is viewed.
Illustrative example only
Earnings base
- $500K normalized SDE
- Supportable financial records
- Identifiable adjustments
Valuation context
- Transferability and risk
- Comparable market evidence
- Buyer demand and financeability
Applying an illustrative multiple to $500K of normalized SDE can help frame a range, but it is not a valuation promise. The multiple and resulting value depend on the evidence, market and specific business.
Add-backs
Adjustments need more than a label.
An add-back should be identifiable in the records, supportable with documentation and relevant to how a buyer would operate the company. Aggressive or poorly supported adjustments can reduce confidence in the entire financial presentation.
A multiple is an output—not a strategy.
From value to outcome
Four numbers owners should never confuse.
Valuation estimates what the business may reasonably be worth. Purchase price is what a buyer agrees to pay. Cash at closing depends on the form and timing of consideration. Net proceeds reflect seller-level adjustments, transaction costs and taxes.
Revenue multiples alone can be misleading for many privately held businesses because revenue does not reveal margins, capital needs, owner dependence or the quality of earnings.