A buyer typically prices a small company by taking what it earns for the person who owns it and multiplying that by a number that reflects how risky the earnings are. Earnings times a multiple: most negotiation about price is a negotiation about one of those two inputs.

The figure is not revenue

A common first mistake is to quote a company by its revenue. Two companies can bill the same amount in a year while one keeps a large share of it and the other very little. They are not worth similar amounts, and a buyer will not price them similarly. Revenue is how large the company is; earnings are what a buyer purchases.

Owner earnings, defined

The measure used for owner-run companies is seller's discretionary earnings, usually shortened to SDE: how much the company puts in the pocket of the one person who owns and runs it, in a normal year. It is built by starting from the profit on the books and adding back what the company pays the owner and pays for the owner:

  • The owner's salary. A buyer will pay itself differently; the money was available to the owner, so it counts.
  • Personal expenses run through the company. The vehicle, the phone, the health insurance, the conference that also served as travel.
  • Genuine one-time costs. The flood repair, the settled lawsuit, the software migration: costs a buyer will not face in a normal year.

Profit, plus the owner's salary, plus the personal costs the company covers, plus a one-time repair, is the seller's discretionary earnings. That is the arithmetic a buyer will apply to the owner's numbers, and it is worth doing before anyone else does. Every add-back must be provable: one that is documented is earnings, and one that is asserted is an argument, and arguments are discounted.

The multiple

The multiple is a summary of risk, set by what buyers have recently paid for comparable companies. For reference, BizBuySell's national data across all industries showed businesses selling at a median of 2.7 times cash flow in the second quarter of 2026. Service companies with real recurring revenue may sit above an all-industry median, and companies that depend entirely on their owner typically sit below it. Where a company lands is not luck; it is the list below.

Source: BizBuySell Insight Report, Q2 2026. National, all industries: a reference point, not a valuation of any company.

What moves the multiple

  • Recurring revenue that can be documented. Contracted, scheduled work that renews is often the most valuable thing a service company owns. Separated on the financials, it tends to raise the multiple; blended into total revenue, it raises nothing.
  • Customer concentration. Where one account is a large share of revenue, the buyer prices what happens if it leaves.
  • Whether the company runs without the owner. Every part of the operation that lives only with the owner is priced as risk.
  • Clean books. Financials that match the tax returns, and accounts a stranger can follow.
  • Licenses that survive the sale. Where a company operates under licenses, whether the license holders stay is often a buyer's first question.

What does not move it

The condition of the premises, the signage, the age of the fleet, how difficult the years were, and what the owner requires for retirement. None of it is improper to raise; all of it is invisible in the arithmetic. A buyer pays for the income stream and its risk, and preparing a company for sale is the work of improving one or both.

Where this fits: the first conversation, and the arithmetic the firm's written assessment applies to a company's real numbers. Next in the series: the vocabulary of a sale.