Every owner wants one number. The honest answer is that it stays a range until a buyer commits to it — but the range is not arbitrary, and it is not a mystery held by professionals. It comes out of arithmetic you can follow, and most of the movement inside it is caused by things you could name this afternoon.
In short
- Value is a multiple of earnings, not a share of revenue. Revenue says how busy you are, not what a buyer keeps.
- The multiple is a risk score. Its single biggest input is how much of the business leaves when you do.
- There is no public record of what businesses actually sold for. Anyone quoting a precise local comparable is estimating.
Start with the earnings, not the price
The figure almost every small-business valuation is built on is seller's discretionary earnings: profit, plus the owner's own compensation, plus the costs that exist because you own it and would not exist for the next owner. It is the money one working owner takes out of the business in a year.
Add-backs are legitimate and expected. What makes them credible is that each one is listed, evidenced and consistent across years. An add-back a buyer cannot verify is not an add-back, it is a claim, and it comes straight back out of the number during diligence.
- Owner salary and payroll taxes on it
- Personal costs run through the business, itemised rather than summarised
- Genuine one-offs — a legal settlement, a flood, a launch that failed — with the evidence beside them
- Not: recurring costs relabelled as one-offs, or a salary for work someone still has to do
The multiple is a measure of risk
Two businesses with identical earnings sell for different money, and the gap is not sentiment. A buyer is pricing the chance that the earnings continue without you. Everything that makes that more likely raises the multiple; everything that makes it a gamble lowers it.
This is the part an owner can change. Owner dependence, customer concentration and undocumented process are the three that move it most, and all three take months rather than weeks to fix — which is the real argument for starting a year or two before you want to be out.
| Business A | Business B | |
|---|---|---|
| Annual revenue | $1,200,000 | $1,200,000 |
| Seller's discretionary earnings | $240,000 | $240,000 |
| Largest customer | 6% of revenue | 31% of revenue |
| Owner's role | Reviews numbers weekly | Quotes every job personally |
| Illustrative multiple | 3.5x | 2.0x |
| Indicated value | $840,000 | $480,000 |
The multiples here are illustrative arithmetic, not quoted market rates. The point is the size of the gap, not the figures.
What the multiple does not include
A price built on a multiple of earnings usually assumes the business transfers with the equipment it needs, a normal level of working capital, and no debt attached. Things outside that get handled separately, and owners are frequently surprised by which ones.
Real estate is the common one. If you own the building, you are selling two things, and it is usually cleaner to price them apart — the business at a multiple of earnings, the property at what property is worth — with a lease between them.
- Inventory is often added at cost on top, if it is saleable and counted
- Business debt is normally repaid at closing out of the proceeds, not inherited
- Cash in the account is yours unless the agreement says otherwise
- Real estate you own is a separate negotiation, usually with a lease attached
Why nobody can hand you a comparable
In residential property you can look up what the house down the road sold for. In business sales you cannot, anywhere in the country. Private transactions are not recorded publicly, the terms that shaped the price are confidential, and the databases that exist are built from what participants chose to report.
Asking prices are visible and are not the same thing. A business listed for a year at a number nobody paid tells you about one owner's hopes. Treat any precise local figure — including a flattering one — as an estimate whose basis you are entitled to ask about.
Common questions
- Can I value my business as a percentage of revenue?
- Rules of thumb based on revenue circulate in most industries and are a rough sanity check at best. Two businesses with the same revenue and very different cost structures are worth very different money, and a buyer funding the purchase will underwrite the earnings, not the turnover.
- Why do two valuations of my business differ so much?
- Usually because they use different earnings figures rather than different multiples. Check which adjustments each one accepted, which year it used, and whether it assumed the owner stays. Those three choices account for most of the spread.
- Do I get paid separately for stock and equipment?
- Equipment the business needs to operate is normally assumed within the price. Saleable inventory is commonly added on top at cost, counted at or near closing. Both should be written into the agreement rather than assumed, because assuming is how deals fall apart in the last fortnight.
- Does the buyer take on my business debt?
- Typically not. Most small-business sales are structured so that debt secured against the business is cleared at closing from the proceeds, and the buyer receives it free of those obligations. What happens to any personal guarantee you signed is a separate question and should be settled in writing.
This is general information, not investment, legal, tax or valuation advice. Every business and every transaction differs; take professional advice on your own circumstances before acting.