Valuation is where most first-time buyers feel the most uncertainty. You find a business with $250,000 in SDE and the seller wants $750,000. Is that reasonable? Too high? A steal? Without context, the number is meaningless. With context, you can determine not just whether the price is fair, but what you can negotiate it to.
How Multiples Work
The core concept is straightforward. A business is worth its earnings multiplied by a number that reflects risk, growth, and quality. That number is the multiple.
Purchase Price = Earnings x Multiple
For owner-operated businesses under approximately $1 million in earnings, the earnings metric is typically SDE (Seller's Discretionary Earnings). For larger or management-run businesses, it is EBITDA. The multiple applied to SDE is always lower than the EBITDA multiple for the same business, because SDE is a larger number. Both should produce the same purchase price.
The national median SDE multiple across all industries is approximately 2.3x to 2.8x, according to data from BizBuySell, the IBBA, and the Pepperdine Private Capital Markets Project. But "across all industries" is almost useless for evaluating a specific deal. Multiples vary enormously by industry, business size, and individual business characteristics.
What Drives the Multiple Up
Eight factors have the most consistent impact on where a business falls within its industry's multiple range. Based on our in-depth analysis of real listings and deal discussions, along with established valuation research, these are the factors that move multiples the most:
Size of earnings. This is the single most consistent predictor. Larger businesses command higher multiples because they are perceived as less risky, more institutionalized, and more attractive to a broader pool of buyers. A business with $150,000 in SDE might trade at 2.0x. The same business type at $800,000 in SDE might trade at 3.5x. The relationship between size and multiple is well-established in valuation literature and observable in transaction data.
Revenue growth. Businesses with consistent trailing-twelve-month revenue growth command premium multiples. Declining revenue depresses multiples, often sharply. Flat revenue with stable margins sits in the middle. Growth is the most visible signal of a healthy business, and buyers pay for it.
Recurring revenue. Businesses with subscription, contractual, or maintenance-based revenue command significantly higher multiples than those relying on one-time transactions. The difference can be dramatic: recurring revenue businesses can trade at two to three times the multiple of comparable businesses with purely transactional revenue. Recurring revenue reduces risk for the buyer because it provides a predictable baseline.
Customer diversification. No single customer above 10 to 15 percent of revenue. The top three customers below 30 percent. Diversification reduces the risk that a single event (a customer bankruptcy, a relationship loss during ownership transition) can destabilize the business.
Owner independence. Can the business run for 30 days without the owner? Businesses with documented processes, a capable management layer, and customer relationships held by employees rather than the owner command premium multiples. This is because the buyer is paying for a business, not a job.
Low employee turnover. Businesses with stable, experienced teams are worth more because they carry less transition risk, lower training costs, and stronger institutional knowledge. High turnover is a signal of either poor culture, below-market compensation, or weak management.
Competitive moat. Proprietary technology, regulatory barriers, deep customer relationships, geographic dominance, and strong brand reputation all create defensibility that justifies higher multiples. The test: could a well-funded competitor replicate this business's advantages within two to three years? If so, the moat is weak.
Industry dynamics. Some industries command structural premiums because of favorable supply-demand dynamics, high barriers to entry, or strong tailwinds. Others carry structural discounts because of commoditization, regulatory risk, or secular decline.
Typical Multiple Ranges by Industry
These ranges represent typical SDE multiples for owner-operated businesses. Larger businesses within each category (approaching or exceeding $1M in SDE) will trade at the high end or above. The ranges reflect transaction data, published valuation benchmarks, and patterns observed in our analysis of real listings.
Accounting and CPA firms: 2.0x to 3.5x SDE, or roughly 1.0x to 1.5x annual revenue. The revenue multiple is commonly used because earnings are relatively predictable and recurring.
Auto repair and service: 2.0x to 3.0x SDE. Location, lease terms, and the owner's involvement in hands-on repair work are key differentiators.
Cleaning and janitorial services: 2.0x to 3.5x SDE. Contract-based recurring revenue models command the upper end.
Dental practices: 3.0x to 4.0x+ SDE or 5x to 7x EBITDA. Patient attrition post-sale and associate retention are the primary risks that move the multiple.
E-commerce brands (D2C): 3.0x to 5.0x SDE for established brands with defensible positioning. Amazon-dependent brands with limited brand equity trade lower, often 2.5x to 3.5x.
HVAC, plumbing, and electrical: 2.5x to 4.0x SDE. Businesses with recurring maintenance contracts, licensed technicians, and strong management teams command the upper end. Active PE interest in these trades is pushing multiples higher.
Insurance agencies: 1.5x to 2.5x annual revenue, or roughly 3x to 5x+ EBITDA. Book of business retention rates and carrier appointments are the primary value drivers.
IT services and MSPs: 3.0x to 5.0x SDE or 4x to 7x EBITDA. Recurring managed services contracts command premium multiples over break-fix revenue.
Landscaping and lawn care: 2.0x to 3.0x SDE. Extreme seasonality, equipment condition, and crew stability are key factors.
Manufacturing (general): 3.0x to 6.0x EBITDA. Equipment condition, customer concentration, and environmental liabilities drive significant variation.
Med spas: 3.0x to 5.0x SDE. Practitioner retention, injectable revenue percentage, and real estate structure are critical.
Restaurants (full-service): 2.0x to 3.0x SDE or 2x to 4x EBITDA. Lease terms, liquor license, concept transferability, and food cost discipline are key.
SaaS businesses: 4.0x to 12.0x ARR (Annual Recurring Revenue), with the range driven by growth rate, churn, and gross margins. Businesses with net revenue retention above 100 percent and growth above 30 percent command the high end.
Self-storage: Valued primarily on a capitalization rate (cap rate) basis, typically 5 to 8 percent, which equates to roughly 12x to 20x net operating income. This is more akin to real estate valuation.
Service businesses (general, non-trade): 2.0x to 3.0x SDE. Owner dependence and customer concentration are the most common discounting factors.
Staffing firms: 2.0x to 4.0x SDE or 3x to 6x EBITDA. Temp revenue versus permanent placement revenue drives the split.
Why You Should Triangulate
No single valuation method is sufficient. The most reliable approach is to estimate value using multiple methods and look for convergence.
Earnings multiple (SDE or EBITDA times the appropriate multiple range): the primary method for most small businesses.
Comparable transactions: what have similar businesses in the same industry, size range, and geography actually sold for? BizBuySell, DealStats, and the Business Reference Guide are the best public sources.
Discounted cash flow (DCF): project the business's future cash flows and discount them back to present value. For small businesses, discount rates of 12 to 18 percent reflect the higher risk of private ownership compared to public companies. The terminal value assumption (what the business is worth at the end of the projection period) typically drives 60 to 80 percent of the total value, making it the most sensitive assumption in the model.
Asset-based floor: what are the business's tangible assets worth if you liquidated them? This is most relevant for asset-heavy businesses (manufacturing, construction) and serves as a sanity check rather than a primary valuation method.
When two or three methods converge on a similar range, you have a reasonable basis for negotiation. When they diverge significantly, dig into why. The divergence itself is information about the deal's risk profile.
References and Sources
- BizBuySell, "Insight Report," quarterly transaction data on small business sale prices and multiples
- Business Reference Guide, 36th Edition, industry-specific valuation benchmarks and rules of thumb
- Pepperdine Graziadio Business School, "Private Capital Markets Report," data on deal structures and pricing
- Shannon Pratt, Valuing a Business, 5th Edition, on discount rates and size premiums
- First Page Sage, meta-analysis of factors influencing valuation multiples
- NYU Stern, Aswath Damodaran, industry margin and valuation data
- DealScorer in-depth analysis of real small business listings