What is an earnings multiple?
An earnings multiple is the price divided by a defined annual earnings measure. If a business is priced at $600,000 and has $200,000 of verified SDE, its asking-price-to-SDE multiple is 3.0×. The reverse calculation is earnings × a comparable multiple = an indicative operating value. The calculation is simple; choosing a defensible comparison is the hard part.
Choose SDE or EBITDA consistently
SDE is useful when a buyer will work in the business and receive one owner's compensation. EBITDA is more useful when management compensation remains an ongoing expense. For example, $200,000 SDE and $120,000 EBITDA are different denominators; multiplying each by 3× does not produce equivalent estimates. State the earnings period, normalization adjustments and whether the quoted price includes debt or excess cash.
Build a range from comparable deals
Look for transactions in the same industry, earnings range, geography and operating model. Verify whether a quoted multiple refers to asking price or completed sale, SDE or EBITDA, and whether inventory, working capital and real estate were included. As a hypothetical sensitivity test, $200,000 SDE × 2.5×, 3× and 3.5× produces $500,000, $600,000 and $700,000. Those numbers are scenarios, not current market benchmarks.
Adjust your scenarios for customer concentration, owner dependence, recurring contracts, growth, capital expenditure and the quality of financial records. A fast-growing company is not automatically worth more if revenue disappears when the owner leaves.
Check the purchase economics
Compare the indicative value with the asking price and run a financing case. Debt service, a replacement manager, taxes, working capital and required investments affect what the buyer can pay. Ask an experienced appraiser or accountant to reconcile methods for a consequential transaction.
Frequently asked questions
- What is a good multiple for a small business?
- There is no universal multiple. Compare actual deals on the same earnings basis, then adjust for industry, size, risk, transferable operations and assets included in the price.
- Can I value a business by revenue alone?
- Revenue can help compare similar companies, but it does not show whether sales are profitable or durable. Verify earnings, margins and cash needs before using a revenue multiple.
Further reading & sources
Educational content only. WhatBiz does not provide legal, tax, accounting or investment advice — consult licensed professionals before any transaction.