What Does “A Multiple” Really Mean When Valuing a Business?
Most business owners have heard some version of this:
“Businesses in your industry sell for 3 times earnings.”
“Construction companies are getting 4x.”
“I heard someone got 6x.”
It sounds simple.
But it rarely is.
Let’s break it down properly.
A Multiple of What?
A multiple is typically applied to earnings — not revenue.
For smaller owner-operated businesses, we usually look at Seller’s Discretionary Earnings (SDE). That’s your net profit plus add-backs such as owner compensation, personal expenses run through the business, one-time costs, interest, depreciation, etc.
For larger businesses with management in place, the metric is typically EBITDA — Earnings Before Interest, Taxes, Depreciation, and Amortization.
Very rarely is a serious buyer valuing your business as a multiple of revenue. Revenue without profit is noise. Buyers purchase cash flow.
Why Revenue Multiples Are Misleading
Two companies can both generate $5 million in revenue.
One might produce $1 million in real earnings.
The other might produce $150,000.
Same revenue. Vastly different value.
That’s why revenue multiples are generally unreliable in small and mid-market transactions.
So What Is the Multiple?
Multiples vary widely.
In smaller privately held businesses, it can be:
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1x earnings
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2x
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3x
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4x
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And occasionally 5x, 6x or even 7x
But those higher multiples are earned — not assumed.
And this is where many owners get into trouble.
A multiple you hear about is usually an average. A starting point. A headline.
It is not automatically the number that applies to your business.
What Actually Drives the Multiple?
The multiple applied to your earnings depends on risk.
The lower the perceived risk to a buyer, the higher the multiple.
Some of the major factors include:
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Industry stability and demand
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Consistency and trend of earnings
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Quality of financial documentation
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Customer concentration
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Strength and depth of management
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Key employees in place
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Value of hard assets
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Recurring revenue vs. project-based revenue
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Contracts in place and whether they are transferable
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Licensing or regulatory exposure
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Reliance on the owner
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Market conditions and access to financing
Two companies in the same industry with identical earnings can receive very different multiples because one is cleaner, more transferable, and less risky.
The Critical Point Most Owners Miss
A multiple is not something you look up and apply like a tax rate.
It requires judgment.
It requires experience reviewing comparable sales.
It requires understanding how buyers and lenders will view your specific situation.
And most importantly, it requires the ability to see your business through the eyes of a buyer — not through the lens of the owner who built it.
That is not something a formula can do.
Final Thought
If you are thinking about selling — or even if you are just curious — the right question is not:
“What is the multiple in my industry?”
The right question is:
“What multiple would apply to my business — and why?”
If you would like a clear, professional assessment of where your business stands and what drives its value, I’m always happy to have a confidential conversation.
Even if you are not planning to sell today, understanding how buyers will evaluate your company is one of the most valuable exercises you can undertake as an owner.
— Anthony Rigney
Broker and Owner
Quorum Business Advisors