Small businesses are usually priced as a multiple of earnings. The first thing to establish is which earnings number everyone is talking about, because the same business can be described three ways.
The measures
- SDE (seller’s discretionary earnings): profit plus the owner’s salary and perks. Used for owner-operated businesses, where you will be the owner doing the job.
- EBITDA: earnings before interest, tax, depreciation, and amortization, with a market-rate manager’s salary already deducted. Used once a business is big enough to be managed.
- Revenue multiples: common in software, rare and usually a red flag in small service businesses.
For very small owner-operated businesses, transaction prices commonly land in the low single-digit multiples of SDE, with larger and less owner-dependent businesses trading higher. Treat any published range as a rough orientation rather than a rule — the actual number depends on the specific business and what a lender will support.
What moves the multiple
- Owner dependence: the single biggest factor at this size.
- Recurring revenue and contracts versus one-off project work.
- Customer concentration and how transferable relationships are.
- Growth trend, staff quality, and whether systems are documented.
Two businesses with identical earnings can be worth very different amounts, and the difference is almost always how much of the business lives in the departing owner’s head.
Try it
Take a business you are looking at and write down its earnings measure, the multiple implied by the asking price, and three specific reasons it deserves more or less than similar businesses. If you cannot argue the multiple, you are not ready to offer.