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· 4 min read
How to Value a Business on a Multiple
Heshan Fernando
Co-founder & COO
Two brokers value the same business. One says 840,000, the other says 1,120,000. Neither is being unreasonable, and both used the same arithmetic.
They applied a 3.0 and a 4.0 multiple to the same earnings figure. The whole disagreement is one number, and it carries all the judgement in the valuation.
Get the earnings basis right first
Before the multiple, decide what you are multiplying. Using the wrong basis with the right multiple produces an answer that can be out by a factor of two.
SDE — seller’s discretionary earnings — adds back the owner’s salary, benefits and personal expenses run through the business. It is the standard for owner-operated businesses where the buyer will step into that role. SDE is a larger number than EBITDA, so SDE multiples are correspondingly lower.
EBITDA leaves management costs in place. It suits businesses that run with managers, where the buyer is acquiring an operation rather than a job.
The error to avoid is applying an EBITDA multiple to an SDE figure. It happens because both are “earnings”, and it inflates the valuation substantially.
| Basis | Owner’s salary | Typical use |
|---|---|---|
| SDE | Added back | Owner-operated, smaller businesses |
| EBITDA | Left as a cost | Management in place |
| Revenue | Not relevant | Where earnings are negative or volatile |
Where the multiple comes from
Comparable completed transactions in the same sector and size band. Not asking prices, and not a general rule of thumb, both of which run higher than what businesses actually sell for.
Within a sector’s range, the factors that move a business up or down are consistent:
Customer concentration. A business where one client is 40% of revenue trades at a discount, because that client leaving is an existential event.
Recurring revenue. Contracted or subscription income is worth considerably more per pound than project work.
Owner dependence. If the business is the owner’s relationships and expertise, the buyer is purchasing something that walks out on completion day.
Growth and margin trend. Direction matters as much as level.
A business scoring badly on all four sits at the bottom of its sector range regardless of its earnings.
Present a range, not a number
At a 3.5 multiple on 280,000 of EBITDA the answer is 980,000. At 3.0 it is 840,000; at 4.0 it is 1,120,000.
That 280,000 spread across half a turn either way is the honest answer. A single figure implies a precision the method does not have, and in a negotiation it is a number you will be held to.
Anyone quoting a valuation to three significant figures from a multiple is presenting an assumption as a measurement.
Normalise the earnings first
The multiple gets the attention and the earnings figure carries as much of the answer.
Reported profit reflects decisions made for tax and for the owner’s convenience rather than for a buyer. Normalising adjusts for them:
Owner’s remuneration above or below a market rate for the role.
Personal expenses run through the business — vehicles, travel, family on the payroll.
One-off items — a legal settlement, a large bad debt, a grant — in either direction.
Rent paid to a property the owner also owns, which may be above or below market.
Each adjustment changes the earnings figure and therefore the valuation by the multiple. A 20,000 normalisation at a 3.5 multiple is 70,000 of value, which is why buyers scrutinise this line hardest.
Common mistakes to avoid
- Applying an EBITDA multiple to an SDE figure.
- Using asking prices as comparables rather than completed transactions.
- Normalising earnings optimistically — adding back genuine recurring costs as one-offs.
- Quoting a point estimate rather than a range.
- Treating the multiple as a market fact rather than a judgement about this specific business.
How to do it with Business Valuation Multiple Calculator
The Business Valuation Multiple Calculator shows the sensitivity alongside the answer.
- Enter revenue and the earnings figure on the basis your sector uses.
- Apply a multiple drawn from comparable completed transactions.
- Look at the range across half a turn either side — that spread is the real output.
- Take anything that matters to an accountant or valuer who can normalise the accounts properly.
Other business calculators are in the tools directory.
Frequently asked questions
SDE or EBITDA?
SDE for owner-operated businesses where the buyer replaces the owner; EBITDA where management is already in place. Applying one’s multiple to the other’s earnings figure can nearly double or halve the result.
Where do multiples come from?
Comparable completed transactions in the same sector and size band. Published ranges are broad, and where a business sits within one depends mostly on customer concentration, recurring revenue and owner dependence.
Is a multiple valuation a real valuation?
It is a sanity check. A real valuation normalises the accounts, examines the customer base and tests the assumptions — and the eventual price is settled by negotiation regardless.
Final thought
Quote the range. Half a turn either side of your multiple is a large sum, and pretending otherwise is the fastest way to lose credibility in the conversation that follows.