How to value a small business and the deal terms that matter beyond price

What a multiple means

A multiple is price divided by earnings. If a company earns $470,000 of SDE and sells for $1,645,000, the multiple is 3.5x SDE. If the same company earns $350,000 of EBITDA after paying a manager, the same price is 4.7x EBITDA. Multiples summarize how the market weighs risk, growth and size. Two companies with the same earnings can trade at very different multiples, and two multiples are only comparable if the earnings measure and the deal structure match.

Because a multiple is only as good as the earnings underneath it, the previous guide on evaluating a business is a prerequisite. A bid built on the seller's SDE when a lender will use EBITDA is a bid you cannot finance.

Benchmarks you can cite

Benchmarks give a range. They are not a price for your target. Each of these has a source and a scope, and you should not mix them.

What moves the multiple

Buyers and lenders adjust a base multiple up or down for each of these factors.

• Size. Larger earnings attract more buyers and cheaper capital and lower perceived risk.
• Recurring revenue and contracts. Predictable income supports a higher multiple.
• Growth. Steady or growing earnings over three years beat a recent spike.
• Customer concentration. Dependence on a few customers lowers the multiple.
• Owner dependence. A business that needs the owner is worth less to a buyer who is not the owner.
• Capital intensity. Companies that need constant equipment spending convert less of their earnings into cash.
• Financial records. Clean, reconciled books make a deal easier to finance and close, and justify a better price.
• Industry and market. Durable demand and fragmented competition support higher prices.

Worked example: from earnings to a price range

Continue Example Co from the previous guide: SDE of $470,000 and adjusted EBITDA of $350,000. Suppose, for illustration only, that comparable deals in this niche have closed between 3.0x and 4.0x SDE. The table shows the range and the equivalent EBITDA multiple.

For the rest of this handbook we use a $1,650,000 business purchase price, a round number near the middle case. The next steps are to test it against what a lender will fund, and what your own cash flow can support.

Turning the price into sources and uses

A purchase needs cash for more than the price. Add the buyer's costs, such as legal and accounting fees, third-party reports and an initial working capital cushion. The table below is an illustrative sources and uses statement for Example Co with SBA 7(a) financing, built to match the SBA's 10 percent equity rule. The seller note is on full standby, which lets it count as part of the equity injection.

Equity is $180,000, which is 10 percent of $1,800,000 total project costs. Of that, the standby seller note is $90,000, which is half the required injection, the maximum the SOP allows from limited sources. The other $90,000 is the buyer's own cash. The SBA guide computes the debt service and the coverage ratio for this structure.

What if the valuation comes in lower

Under SOP 50 10 8.1, the business valuation must support the business purchase price regardless of how the debt is structured. If the amount paid exceeds the valuation, the difference must be made up by equity. In the example, if an independent valuer concludes $1,500,000, there is a $150,000 gap. Options are to reduce the price, to add more equity, or to cover the gap with additional limited-source funds, which the SOP says must then be on full standby. Raise this possibility with the seller before you sign the LOI so that a valuation issue is not a surprise.

Deal terms beyond price

The table lists terms to settle in the LOI and the purchase agreement. Each one can move value as much as a point of multiple.

How to build a bid

Use the following steps when you are ready to make an offer.

• Fix your normalized earnings number and write down the add-backs you accept and reject.
• Choose the multiple range from comparable closed deals in the niche, not from asking prices.
• Test the price against the financing: equity, DSCR at 1.25 or higher, and the valuation.
• Write your maximum price before you see the seller's. Do not exceed it.
• Decide what you will trade for price: a larger seller note on full standby, a longer transition, a share of upside via a buyer-friendly structure, or a faster close.
• State the offer in writing in the LOI, with the key terms in the table above.

Antitrust filing thresholds

Most deals in these guides are far below the Hart-Scott-Rodino filing threshold, which the FTC raised to $133.9 million for 2026 (effective in February 2026). Larger deals may also need a size-of-person test. Ask your lawyer to confirm if your purchase price, or the total value of assets you acquire, approaches the threshold.

A pricing worksheet

Fill this out before every LOI.

PRICING WORKSHEET

Company: ____________   Date: ________

1. Normalized earnings
SDE (verified): $________   EBITDA after manager: $________

2. Multiple range from closed comparable deals
Low ____x   Middle ____x   High ____x   Source of comparables: ____________

3. Price range
Low $________   Middle $________   High $________

4. My maximum price: $________ (written before seeing the asking price)

5. Financing check
Total project cost: $________
Required equity (10 percent of total project cost for SBA initial acquisition): $________
Of which from limited sources (seller standby note, minority investors): $________ (cannot exceed half)
Loan amount: $________   Annual debt service: $________
DSCR (EBITDA / debt service): ____ (floor 1.25)

6. Valuation risk: if independent valuation is ____% below price, I will: reduce price / add equity / walk

7. Non-price terms I need: working capital peg, seller transition ____ months, non-compete ____ years, indemnity escrow ____

Valuation methods in brief

Most small-business pricing uses multiples of earnings. Professional valuers, including those who prepare SBA-required valuations, also consider other methods and reconcile them. The table summarizes the main ones.

The SBA SOP does not prescribe a method but requires that the valuation be performed by a qualified, independent source and support the business purchase price. Ask the valuer which methods they will use and what comparable data they rely on.

How price affects financeability

Price does not only decide what you pay. It decides whether a lender can fund it. The table shows Example Co at three prices, holding the other assumptions constant: $60,000 of buyer costs, $90,000 of working capital, 10 percent equity of total project costs, an SBA loan for the rest, a 10 percent interest rate (illustrative) and 10-year amortization.

At 4.0x SDE the coverage ratio is 1.21, below the SOP's 1.25 floor for Initial Acquisitions, so a lender could not approve it on these assumptions, even though the price looks only 14 percent above the middle case. The lesson is to test your price against the lender's test before you offer, using EBITDA after a manager and your real financing terms.

Trading price for terms

Sellers care about the total value they receive, certainty and what happens to their employees. You can often close a gap on price with terms.

Asking prices versus sold prices

Listings show what sellers hope for, not what buyers paid. The BizBuySell figures cited above are for closed transactions, which is why they are more useful as a benchmark than the multiples implied by asking prices on a marketplace. When you compare a listing's asking multiple with closed-deal data, expect asking prices to be higher, and ask the broker how long the listing has been live and whether the price has changed.

Do not anchor on a seller's mental price either. Owners often value a business by what they need to retire, or by an offer they once heard. Your job is to anchor on verified earnings and on what a lender will finance, and to explain your reasoning with the same documents.

Common valuation errors

• Applying an SDE multiple to EBITDA, or the reverse.
• Using the seller's add-backs without testing them.
• Valuing a peak year instead of a three-year view.
• Ignoring working capital, so you pay for earnings and then have to fund the cash the business needs.
• Forgetting the cost of replacing the owner.
• Paying for growth the seller has not delivered, and cannot document.
• Mixing real estate value with business value. The SBA treats the business purchase price as excluding owner-occupied real estate, and requires a separate appraisal for the real estate.

What a valuer will ask you for

When a lender orders the independent valuation, the valuer needs information from the buyer and seller. Expect requests for three to five years of financial statements and tax returns, the proposed purchase agreement or LOI, a list of assets included, customer and revenue breakdowns, a description of the owner's role and compensation, and information about the industry. The faster you respond, the faster the lender gets the report, which matters when exclusivity is running.