And why the number in your head is probably wrong.
Most owners we talk to already have a number in mind. It came from a neighbor who sold his company, a broker's quick math, or the old rule that a business is worth X times its profit. Sometimes that number is close. More often it is wrong, and it is wrong in a way that can cost owners real money, either by scaring them out of a good deal or by anchoring them to a price no serious buyer will pay.
So we wanted to share our perspective based on our experience.
Two things drive it: 1.) what your business earns and 2.) how risky those earnings look to the person writing the check. Given that both of those are subjective, a multiple is not a fact you can look up. It is a buyer's shorthand for how confident they are that your earnings will continue after the deal closes.
There is a quiet but important shift that happens as a business crosses roughly $1 million in annual profit.
Below that line, most buyers are individuals looking to buy themselves a job and a good living. They value your company on Seller's Discretionary Earnings, or SDE. That is the total benefit the business throws off for a single owner-operator: your profit, plus your salary, plus the personal costs you reasonably run through the company. They add your pay back in because they are stepping into your seat.
Above that line, you attract a different buyer: search funds, private equity, and strategic acquirers who are not planning to run your business themselves. They value your company on EBITDA, short for earnings before interest, taxes, depreciation, and amortization, which is really just a simplified measure of the company's operating profit. Oftentimes these buyers treat your salary the opposite way: they subtract what it would cost to hire a professional manager to do your job, because that manager is a real cost they'll take on once they own the business, to the extent you're not staying on to run it.
That sounds like bad news, but can in many cases be a good thing for owners.
Picture two companies. The first clears $600k a year for an owner who runs everything himself. A buyer values it on SDE and pays maybe three times that number, so around $1.8 million. The second clears $1.5 million (150% more than the first business) and has a general manager handling the day to day. A buyer values that one on EBITDA. First they subtract a market salary for the manager who would replace the owner, say $150k, which leaves about $1.35 million of adjusted earnings. But because the business operates without its founder, they pay a higher multiple on that figure, say five times, so around $6.75 million, or 275% more than the smaller company.
Same industry, but the owner of the larger business gets a premium on their multiple, in large part because most buyers would view their business's earnings as less risky.
This is where most rules of thumb fall apart. There is no single "door multiple" or "septic multiple." Two companies with identical earnings can fetch wildly different multiples based on risk alone. Recurring or contracted revenue earns more than one-off project work. A business that leans heavily on the owner will fetch a lower price than one that does not. A company where a single customer is 30 percent of sales will get dinged on valuation compared to one with a broader base of customers. We will dig into each of these later, because they are important factors to understand before you go to sell, and are within your control until then.
We are a buyer, so read this with that in mind. But here is what we believe: the owners who get the best outcomes are not the ones with the best broker (as important as they are). They are the ones who walk in knowing their real earnings and their real risks. When you know your number and you know why it is what it is, you negotiate from strength, you spot a lowball fast, and you do not get talked out of a fair price.
That is good for both you and buyers like us, because a well-understood business is a cleaner, faster, more straightforward deal. We would rather pay a fair price to an owner who knows what they have than steal a business from one who does not.
Knowing what your business is worth is step one. In another post, we cover the hidden discounts: the specific things that quietly drag your multiple down, and what you can do about them before you think about selling.
Run your own numbers through the eight factors buyers weigh.