When it comes to valuing a business, especially for a sale, few tools are as commonly used — or misunderstood — as multiples. Talk to any broker, investor, or buyer, and you’ll hear things like, “This company is worth 5x EBITDA,” or “It’s trading at a 1x revenue multiple.” But what do these numbers really mean? Where do they come from? And how do they influence what a business sells for?
In this post, we’ll break it all down. You’ll learn what multiples are, how they’re used in practice, why they matter when selling a business, and how to approach them with a clear-eyed strategy.
What Are Multiples When It Comes to Selling a Business?
Multiples are shorthand. Instead of going through complex discounted cash flow models, analysts and buyers often rely on a simple formula:
Business Value = Multiple × Financial Metric
The multiple is applied to a specific financial metric — most commonly:
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
- Revenue
- Net income
- SDE (Seller’s Discretionary Earnings) — often used in small business sales
Examples:
- If a business has $1 million in EBITDA and the market dictates a 5x EBITDA multiple, then the business is valued at $5 million.
- If it has $2 million in revenue and is valued at 1x revenue, the price would be $2 million.
The multiple is meant to reflect what the market is willing to pay relative to the business’s earnings or revenue. But not all multiples are created equal.
Where Do Multiples Come From?
Multiples aren’t pulled out of thin air. They usually come from:
- Comparable company analysis (comps): What are similar businesses selling for?
- Precedent transactions: What were the multiples in recent acquisitions in the same industry?
- Public market valuations: For larger businesses, multiples of publicly traded companies may be used as a benchmark.
- Industry norms: Certain industries have standard ranges. For example, SaaS businesses often command high revenue multiples, while traditional manufacturing may be based on lower EBITDA multiples.
But remember: just because an industry average is 3x doesn’t mean your business will sell for 3x. Multiples are starting points, not final answers.
Factors That Influence Multiples
1. Industry
Some industries are simply more attractive than others. High-growth sectors (like software, biotech, or clean energy) often get higher multiples. Low-growth, asset-heavy sectors may trade lower.
2. Size of the Business
Larger businesses usually command higher multiples. A company with $10M EBITDA is less risky and more scalable than one with $500K, and buyers will pay accordingly.
3. Growth Rate
Faster-growing companies tend to receive higher multiples. A SaaS business growing at 50% year-over-year might get a 10x revenue multiple, while one growing at 5% might only fetch 3x.
4. Margins
Higher margins = higher multiples. They reflect operational efficiency and pricing power.
5. Recurring Revenue
A business with predictable, recurring revenue (like subscriptions or long-term contracts) is more valuable than one that relies on one-off sales.
6. Customer Concentration
If one customer accounts for 60% of your revenue, your multiple will take a hit. Buyers want diversification.
7. Owner Dependency
If the business depends heavily on the owner (for relationships, decision-making, etc.), the risk increases — and the multiple drops.
How Multiples Affect the Sale of a Business
Multiples are central to how buyers and sellers negotiate a deal. Here’s how they impact the selling process:
1. Setting Expectations
Sellers often have an inflated sense of what their business is worth. They’ve poured years of sweat into it. But buyers look at cold, hard numbers — and multiples provide a reality check.
Example: If most similar businesses are selling at 4x SDE, and yours is generating $500K in SDE, expecting a $5 million offer is unrealistic. Multiples ground valuations in market reality.
2. Pricing Strategy
A well-priced business attracts more buyers. Price too high (based on an inflated multiple), and your business might sit on the market. Price too low, and you leave money on the table.
Understanding the right multiple for your business — and how it compares to others in your industry — helps you price it to sell.
3. Due Diligence and Deal Terms
Buyers use multiples not just to make offers, but to probe assumptions. If you claim your business is worth 5x EBITDA, they’ll ask why. Is there something unique? Is the growth sustainable? The multiple invites scrutiny — and that can shape deal terms like earn-outs or seller financing.
4. Negotiation Leverage
Multiples give both parties a language to talk about value. Sellers can defend a high multiple by pointing to growth, customer retention, or IP. Buyers can push for lower multiples by pointing to risks.
It becomes a negotiation not just of numbers, but of story — why your business deserves a premium multiple (or doesn’t).
Ways to Increase Your Multiple Before Selling a Business
If you’re planning to sell your business, improving your multiple can have a huge impact on the final price. Here are smart ways to boost it:
- Improve your margins – even a small bump in profitability can significantly increase your value.
- Diversify your customer base – reduce concentration risk.
- Create recurring revenue – add subscription models or service contracts.
- Document systems and processes – reduce owner dependency.
- Lock in growth – close deals or sign contracts that show future revenue.
Think of your multiple as a reflection of perceived risk and upside. Reduce the risk, increase the upside, and your multiple will rise.
Avoiding Pitfalls
Mistake #1: Chasing Industry Highs
Just because a hot startup sold for 2x revenue doesn’t mean your local IT services firm will. Apples to apples matters.
Mistake #2: Ignoring the Buyer’s Perspective
Buyers look at future cash flow and risk. If your business is declining, no multiple will save you. Focus on fundamentals, not wishful numbers.
Mistake #3: Focusing Only on the Multiple
The structure of the deal matters just as much. A 2x multiple with 80% cash at close is better than a 4x multiple with a 3-year earn-out and lots of strings attached.
Final Thoughts When It Comes to Multiples and Selling A Business
Multiples are powerful — but they’re not magic. They’re a shortcut to understanding business value, not a replacement for real analysis. When used right, they help sellers set fair expectations, help buyers make rational offers, and create a common language for negotiation.
If you’re selling your business, focus not just on the multiple itself, but on the factors that drive it. Improve those levers — growth, profitability, systems, and customer mix — and your business won’t just sell faster. It’ll sell for more.
The key takeaway?
Multiples don’t just reflect your business’s value. They reflect its quality.
Want a higher multiple? Build a better business.
