We know selling your business comes with a lot of questions. This is part of our ongoing series, breaking down everything you need to know step-by-step. 

When you start looking into what your business is worth, you'll hear the word "multiple" almost immediately: "5x earnings," "4 to 5 times EBITDA," "businesses like yours go for 3x." It's the standard shorthand of business valuation, and a common source of confusion for first-time sellers.

So what is a multiple, where does yours come from, and why might it be higher or lower than the industry average? That's what this post covers.

What a multiple actually is

A valuation multiple is a ratio that estimates what a business is worth relative to a financial metric.

But underneath the ratio, a multiple is shorthand for how buyers price risk. When someone pays 4x your earnings, they're betting it takes roughly four years of those earnings to get their money back. The more confident they are that your earnings will keep showing up after you leave, the more years they'll pay for upfront. The less confident, the fewer.

Industry averages give you a starting range. For instance, a neighborhood café might trade around 2.8–3.3x, a B2B services firm at 4–5x. 

But the average is not your number. Your number depends on what a buyer sees when they look under the hood of your business.

A multiple of what, exactly?

"4x" means nothing until you know what's being multiplied. This is where a lot of first-time sellers get tripped up, because if you Google "valuation multiples," most of what comes back— price-to-earnings ratios, price-to-book, enterprise value—is written for people analyzing publicly traded stocks. Those metrics exist, but they're not how businesses in the $1–10 million range get priced.

For a smaller business, you'll really only encounter two:

A multiple of SDE (seller's discretionary earnings). This is the total financial benefit one owner-operator takes out of the business: the profit, plus your salary, plus personal expenses run through the company. Smaller businesses—typically under $1 million in earnings—are usually priced this way, because the buyer is often an individual who will step into your shoes and live off that same pool of money.

A multiple of EBITDA. This is the company's profit before interest, taxes, depreciation, and amortization; it is a rough measure of the cash the operation itself generates, separate from how it's financed. Larger businesses, and businesses with a management team that runs day-to-day operations, are usually priced this way. Buyers here are often companies or investors, not individuals, and they think in terms of the cash flow left over after paying a manager to do your job.

EBITDA is always smaller than SDE, because it subtracts a market salary for whoever replaces you, so an EBITDA multiple is applied to a smaller number and tends to be higher. A "3x SDE" business and a "4.5x EBITDA" business can be the same business. 

This is exactly why comparing your multiple to a friend's, or to a number you read online, can be misleading: if you don't know what was multiplied, the multiple tells you nothing.

Occasionally you'll also see revenue multiples ("1x sales"), but for most businesses this size they're a rough sanity check at best. Buyers pay for profit, not revenue. $2 million in sales with no profit isn't worth $2 million.

Where industry multiples come from (and why to be careful with them)

The other big misconception is that multiples are fixed, or that there's an official number for your industry and your job is just to look it up.

The ranges you see quoted come from data on businesses that actually sold, and the quality of that data varies enormously. When you read "landscaping companies sell for 3x" on a website, you usually have no idea what's behind it: how big those businesses were, when they sold, whether the sale included working capital or equipment, or how their earnings were calculated in the first place. A range built from $300K businesses that sold in 2019 tells you very little about your $3 million business today.

Professionals who value businesses for a living pull from databases of completed, verified transactions, where they can see the deal size, structure, and financials, and even then, the real work isn't looking up the number. It's judging whether those sold businesses are genuinely comparable to yours, and adjusting for the ways they aren't: different margins, different customer concentration, different equipment needs, different risk.

Treat any multiple you find online as a rough orientation, not an answer. If someone quotes you a range without being able to explain what's behind it, the range isn't worth much. And the same applies to your own number. The multiple you deserve is an argument you have to be able to support, not a figure you get to pick.

A real example of the gap

Here's a business we looked at recently (numbers changed, but the shape is real). Project-based work, $1.4 million in earnings last year. At a 4x multiple, that's a $5.6 million business..

Now look at the last five years of earnings:

• 2021: $500K

• 2022: $1.1M

• 2023: $730K

• 2024: $530K

• 2025: $1.4M

A serious buyer, especially one using a bank loan to fund the purchase, which is how most businesses this size get bought, doesn't price off your best year. They ask a harder question: if the down year happens again, can the business still make the loan payments?

Run that math on the $530K down year and the price a lender will actually support lands around $4.0 million. That works out to about 2.9x, not the 4x the industry average promised, and a $1.6 million gap from the "easy" answer.

What pushes your multiple up

The things that raise a multiple are mostly things you can work on before you sell.

Earnings that repeat. Revenue under contract, customers who buy every month, work that renews on its own. A buyer will pay more for money that's already promised than money you have to go win again.

A business that runs without you. If you're the top salesperson, the key relationship, and the person who approves everything, the buyer is buying a job you're about to quit. The more your team can run things without you, the more the business is worth to someone else.

No single customer that can sink you. If one customer is 40% of revenue, the buyer prices in the day that customer leaves. Ten customers at 10% each is worth more than the same revenue from two.

Clean, boring books. Financials a buyer can verify quickly, expenses that are clearly business expenses, no mysteries. Messy books don't just lower your multiple. They make buyers wonder what else is messy.

Steady or growing earnings. Buyers pay for the future, and the past is their best evidence. Three flat-to-up years beats one spectacular year sandwiched between two rough ones.

The mirror images of these, owner dependence, one big customer, wild earnings swings, tangled books, are exactly what drags a multiple down. Two businesses with identical profits can sell for wildly different prices because of them.

Final thoughts

The price has to be right, but it is not the whole picture. For a buyer, without understanding the story behind the business, they'll have a hard time convincing a passionate seller they're the right successor. And as a seller, it's easy to obsess over a number that will change your life without considering what it means for your life. Who takes over what you built? What happens to your team, your customers, your legacy?

At Baton, we believe a good transaction gets both parts right: the science of what a business is worth, and the art of navigating what the sale means for the people on both sides. We help buyers and sellers understand a business's true value, then back them with the experts, support, and data to get the deal done well.

If you're wondering where your business stands today, that's the place to start, get your free valuation from Baton and see what's driving your multiple, and what could move it higher.