Business Valuation Multiples Explained

Business valuation multiples are the shorthand buyers use to price a company: a multiple applied to its earnings. The trick is knowing which earnings and which multiple.

Seller's discretionary earnings (SDE)

For owner-operated businesses, value is usually a multiple of SDE: net profit plus the owner's salary, benefits, and one-time or personal expenses run through the business.

EBITDA

Larger companies with management in place are usually priced on EBITDA, earnings before interest, taxes, depreciation, and amortization, after paying a market salary for management.

What moves the multiple up

• Consistent or growing earnings for three or more years
• No single customer above a small share of revenue
• A team that runs the business without the owner
• Recurring revenue and contracts
• A strong lease or owned real estate

What moves it down

• Declining or volatile earnings
• Owner who does everything
• Cash income that is not on the tax returns, since buyers and lenders cannot pay for it
• Short lease or deferred equipment replacement

Real estate is separate

If you own the property, it is valued on its own, on comparable sales and income, and added to the business value or sold separately.

Talk it through with Josh