How Buyers Really Value Small Businesses (It’s Not Just a Multiple)

Jan 21

If you’ve ever typed “how much is my business worth” into Google, you’ve probably seen the same answer over and over.

“Most businesses sell for 3–5x earnings.”

That sentence has probably done more damage to founder expectations than almost anything else.

Because technically, it’s not wrong.
It’s just wildly incomplete.

Buyers don’t buy businesses off a chart. They buy risk profiles. The multiple is just the final math after they decide how risky your business feels to own.

I’ve seen founders with strong revenue get low offers. I’ve seen boring businesses with flat growth get surprisingly good ones. The difference usually isn’t effort or intelligence — it’s how the business looks through a buyer’s lens.

Let’s break that down.

First: Buyers Don’t Start With Price. They Start With Risk.

This is the part founders miss.

When a buyer looks at your business, their first question isn’t:

“How fast is it growing?”

It’s:

“What could go wrong after I wire the money?”

Every concern they uncover lowers certainty. Lower certainty lowers the multiple. Sometimes dramatically.

That’s why two companies with the same profit can sell for wildly different prices.

SDE vs EBITDA (And Why This Changes Everything)

Before we talk multiples, we need to talk about which earnings you’re multiplying.

Seller’s Discretionary Earnings (SDE)

SDE is usually used for:

Owner-operated businesses
Smaller companies
Founder-led operations

It includes:

Net profit
Owner salary
Certain personal expenses run through the business
One-time or non-recurring costs

SDE answers this question:

“How much cash does this business throw off for an owner?”

EBITDA

EBITDA is more common for:

Larger businesses
Teams with management layers
Private equity buyers
Strategic acquirers

EBITDA strips out:

Owner compensation (as discretionary)
Personal add-backs
Financing and tax structure noise

EBITDA answers a different question:

“How profitable is this business as a standalone operation?”

Why founders get confused

Founders hear “4x” and assume it applies universally.

It doesn’t.

A business valued at:

4x SDE
is not the same as
4x EBITDA

And buyers know exactly which one they’re using.

If you want a deeper breakdown of how buyers verify this during a deal, it ties directly into the sale readiness checklist from the last post — especially the part about clean financials and documented add-backs. That’s usually where expectations get reset fast.

Risk vs Predictability (This Is the Real Multiple)

Here’s a truth buyers won’t always say out loud:

A predictable business is often worth more than a fast-growing one.

Growth attracts attention. Predictability attracts confidence.

Buyers ask things like:

Will revenue still exist in 12 months?
Are customers recurring or one-time?
Do margins swing wildly month to month?
Does the business rely on trends or fundamentals?

A business growing 10% a year with stable customers can sometimes command a higher multiple than one growing 40% with shaky retention.

That surprises founders. It shouldn’t.

Customer Concentration: The Silent Multiplier Killer

This is one of the fastest ways a multiple gets cut.

If one customer represents:

10–15% of revenue → usually fine
20–30% → questions start
40%+ → price and structure change

Founders often say:

“But that customer has been with us forever.”

Buyers hear:

“If this one relationship breaks, I’m exposed.”

That doesn’t mean the deal dies. It means:

Lower multiple
Earn-outs
Holdbacks
Longer transition periods

This ties directly into why so many deals fall apart in diligence (which I’ll write about separately), because concentration often isn’t disclosed clearly upfront.

Founder Dependency (The Uncomfortable One)

This is the hardest section for most founders to read.

If the business depends on:

You closing deals
You managing vendors
You holding customer relationships
You making every major decision

Then the buyer isn’t just buying a business. They’re buying you, temporarily.

And buyers discount heavily for that.

The more involved you are, the more they worry about:

What happens when you leave?
What knowledge isn’t documented?
How long transition will take?
Whether employees will stay

This doesn’t kill deals — but it shifts them.

Instead of:

All cash at close

You start seeing:

Earn-outs
Consulting agreements
Retention bonuses

Which brings us to…

Growth vs Stability Tradeoffs (Where Founders Overplay Their Hand)

Founders love growth stories. Buyers love durability.

A buyer will often choose:

Slower growth + stable margins
over
Fast growth + operational chaos

Why?

Because chaos is expensive after acquisition.

Growth that relies on:

Heavy founder effort
Aggressive ad spend
Unproven channels
Constant reinvention

Feels fragile.

Meanwhile, a business with:

Flat but steady revenue
Repeat customers
Documented processes

Feels safer to own.

That safety shows up in the multiple.

How Buyers Actually Build the Valuation (Simplified)

Here’s roughly what happens behind the scenes.

Buyer identifies earnings base (SDE or EBITDA)
Buyer assesses risks:
- Revenue
- Customers
- Founder
- Ops
- Legal
Buyer adjusts the multiple down or up
Buyer adjusts structure (cash vs earn-out)
Buyer sanity-checks against market comps

The multiple isn’t the starting point. It’s the output.

A Quick Example (Made-Up but Realistic)

Let’s say two businesses both generate $300k in earnings.

Company A

15 customers, none over 12%
Founder works 20 hrs/week
Clean financials
Stable margins
Slow but steady growth

Company B

2 customers = 55% of revenue
Founder runs sales + ops
Fast growth
Messy add-backs

Company A might sell for:

4–4.5x earnings

Company B might sell for:

2.5–3x earnings
With earn-outs attached

Same profit. Totally different outcome.

Why Founders Feel “Lowballed”

Most founders aren’t being lowballed. They’re being re-risked.

The buyer isn’t saying:

“Your business isn’t good.”

They’re saying:

“I’m not comfortable paying full price for this level of uncertainty.”

Once you understand that, negotiations change.

You stop defending revenue and start addressing risk.

That’s also why preparation matters so much — and why the checklist from the last post isn’t just busywork. It directly influences how safe your business feels to someone else.

One Final Thing Founders Don’t Expect

The businesses that sell best often weren’t built to sell.

They were built to:

Run without drama
Generate consistent cash
Survive founder absence

Ironically, those are the ones buyers pay premiums for.

Closing Thought

If you want a higher valuation, don’t obsess over the multiple.

Obsess over:

Predictability
Clarity
Transferability
Reduced founder dependency

The multiple will follow.

And if you’re not selling anytime soon, that’s fine — because these same changes usually make the business easier to run right now.

That’s never a bad trade.

James Weldon