How small business valuation multiples actually work

Most small businesses are valued as a multiple of earnings. Take the annual profit the business produces for an owner, multiply it by a number, and you have a rough value. The whole conversation is about that number.

Start with the right earnings figure

For owner-operated businesses that figure is usually seller's discretionary earnings: net profit plus the owner's salary, plus interest, taxes, depreciation, and one-time or personal expenses that a new owner would not repeat. Larger businesses with a management team in place are usually valued on EBITDA instead.

Then adjust the multiple

The multiple moves with risk. Growing revenue, a management team that runs day-to-day operations, a long operating history, diversified customers, and recurring revenue all push it up. Declining revenue, heavy owner dependence, customer concentration, and a short track record push it down.

Why size changes everything

Larger earnings attract a larger pool of buyers, including buyers with institutional capital, so multiples generally rise with profit. A business earning under a million dollars often trades in the low single digits; a business earning several million can command a meaningfully higher multiple for the exact same work.

What a range is for

No calculator can price a specific business. A range tells you which conversation you are in and what would have to change to move up within it. That is usually enough to plan around.