The Difference Between a 2x Business and a 3.5x Business
Smaller businesses sell on a multiple of seller's discretionary earnings, and the range for most of the businesses I work with runs from a little under two times SDE to somewhere around three and a half. Owners hear that range and assume their business sits at the top of it. Buyers assume the bottom until shown otherwise. The distance between two and three and a half on a business earning $600,000 in SDE is $900,000, which is a lot of money to leave to assumption. Here is what actually decides where a business lands in that range.
1. How much of the business is the owner
SDE already assumes one owner working in the business full time. What it does not capture is how much of the value walks out with that owner. A business where the owner does the estimating, runs the key accounts, and is the only one who can fix the machine when it goes down is a business the buyer has to re-staff before they own anything. That is a two-times business, and no amount of profit changes it. A business with a manager who has run the floor for three years, a second person who quotes, and customers who call the office instead of the owner's cell — that one earns its way toward the top of the range, because the buyer is purchasing something that exists apart from you. In smaller deals this is the single biggest lever, and it is also the one that takes longest to move.
2. Whether the numbers hold up under a stranger's pencil
Every business shows a buyer its adjusted earnings, and every buyer rebuilds them. Add-backs that come with documentation — the owner's truck lease, the one-time roof repair, the salary paid to a family member who does not work there — survive. Add-backs that come with an explanation do not. Three years of consistent, reconciled financials that tie to the tax returns read as earnings. A good year following two rough ones reads as a question. Cash that never hit the books is not earnings at all; it is money you paid yourself out of your own sale price. Businesses where the numbers survive diligence intact close near the number that was agreed. Businesses where they do not close lower, or not at all, and the buyer's lender is often the one deciding.
3. What the revenue is made of
Two businesses with identical SDE can have very different revenue underneath it. Service contracts, maintenance agreements, and repeat customers who order every month are revenue a buyer can count on. One-time projects and bids won at the last minute are revenue the buyer has to go out and win again. Concentration works the same way: a distributor with one account at 35 percent of sales is not worth what the same distributor with ten accounts at 8 percent apiece is worth, because the buyer is pricing the day that one customer leaves. The buyers I talk to will pay toward the top of the range for repeatable revenue spread across many customers, and they discount the opposite harder than most owners expect.
4. The things that get in the way of a loan
Most smaller deals close with SBA financing, and the lender has its own list. The lease needs enough term and an assignment clause. Licenses and certifications need to transfer or be reissued. Equipment needs to be in working order and titled to the business. Environmental, zoning, and franchise questions need clean answers. None of this raises the multiple much on its own, but any one of them can take a business from financeable to not, and a business a lender will not finance sells to a much smaller pool of buyers at a much lower price. Owners rarely think about these until a closing checklist does, and by then the fix is on the buyer's timeline instead of yours.
5. The trend, not just the total
Two businesses can show the same trailing-twelve-month SDE with one heading up and one heading down, and they are not worth the same. A buyer is paying for the years after closing. Growth over three years — even modest, steady growth — puts a business in the upper part of the range. A decline, or a flat business in a growing market, pulls it down. This is why the timing decision and the value decision are the same decision: the best number comes while the trend is still your friend.
The takeaway
The range is real, and where you land in it is mostly decided before you ever meet a buyer. A business that runs without its owner, with numbers that survive a stranger's pencil, repeatable revenue across many customers, nothing that stops a loan, and a trend heading the right way is a three-and-a-half-times business. Fix those in that order, and give the fixes time to show up in the record. Two times is what a buyer pays for a job. Three and a half is what they pay for a business.
Thinking about what comes next for your business? Download the free guide — 7 Critical Points Every Business Owner Must Know Before Selling — or book a confidential conversation with Don Emmett. Straight answers from someone who's sat on your side of the table.
