What businesses actually sell for: a plain guide to multiples

The multiple is a shorthand, not a method

When someone says a business "sold for 2.5×", they mean the price was two and a half times its SDE. That is a useful shorthand and a terrible valuation method, because it hides everything that actually determines the number.

A multiple is an output. It is what you get when you divide a price somebody agreed by an earnings figure somebody constructed. Working backwards from it — picking a multiple and multiplying — is how buyers overpay.

Typical ranges

These are market reference bands for owner-operated businesses valued on SDE. They are compiled from marketplace medians, broker survey data and lending norms. They are not records of specific transactions, and they should be used to sanity-check a price rather than to prove a value.

The bands are wide because the same category contains very different businesses. Which end you sit at is decided by the factors below.

What moves a business up its band

Documented earnings. A business with three years of tax returns and clean bank reconciliation trades above one with a spreadsheet. Buyers pay for certainty, and lenders lend on it.

Independence from the owner. If the business runs with a manager and systems, the buyer pool includes people who will never work there. That is a much larger pool.

Recurring revenue. Contracts, memberships, maintenance agreements. Anything that makes next year predictable.

Diversified customers. No client above 10–15% of revenue.

Lease security. Long term, assignable, with options, at a rent the business can carry.

Transferable licences and relationships. Everything that walks out with the seller reduces what you are buying.

Growth that has already happened. Demonstrated growth pays. Potential growth does not — you are being asked to pay today for work you have not yet done.

What moves it down

Owner dependency. If the owner is the business, you are buying a job. Jobs trade at low multiples.

Concentration. One customer at 40% of revenue is not a business, it is a contract with staff.

Short or fragile lease. A lender will not amortise ten years of loan against eighteen months of tenure.

Declining revenue. Two consecutive down years compress a multiple faster than almost anything.

Deferred capital expenditure. Old equipment is a bill, and buyers price bills.

Regulatory exposure. Categories where a rule change can eliminate a product line.

Size. Below roughly $75,000 of SDE, the multiple compresses hard — the buyer pool is thin and lenders are reluctant. Above $500,000, it expands, because search funds and financial buyers enter.

The number that actually caps the price

Here is the thing most buyers discover too late: what a business is worth and what you can pay are different questions.

Take a business with $174,000 of documented SDE. An SBA lender underwriting at 1.25× coverage, after allowing the buyer a $60,000 salary, will support roughly $438,000 of price at prevailing rates and a ten-year term. If the asking price is $525,000, the gap is not a valuation debate — it is $87,000 that has to come from your own pocket or a seller note, because a bank looked at the same numbers and declined.

That constraint is the strongest thing you can bring to a negotiation, precisely because it is not your opinion.

How to use all this

Compute the multiple, but do not lead with it. Lead with:

1. 1.What are the documented earnings? Not the advertised ones.
2. 2.What will a lender finance? That is your ceiling.
3. 3.What is the tangible asset floor? That is what you keep if the goodwill evaporates.
4. 4.Where does the category band put it? That is your sanity check.

Then look at the multiple. If it sits inside the band, it tells you nothing. If it sits well outside, it tells you to find out why — and the answer is usually either a genuine reason you had not appreciated, or a price that has not yet met the market.