Two Businesses, Same Revenue, Wildly Different Price Tags. Here's Why.#
Same industry. Same rough size. Same $1.2M SDE. One business sells for $4.2M. The other sells for $7.8M.
It's not a fluke and it's not one seller being a better negotiator. It's the multiple. Revenue and even SDE only get you half the valuation equation. The other half is the number you multiply it by, and that number moves a lot more than most owners expect.
The formula everyone knows half of#
Business Value = SDE x Multiple
Owners obsess over the SDE side: add-backs, normalization, getting the number as high (and as defensible) as possible. Fair enough, that's real work. But the multiple is where the bigger swings happen, and it's driven by factors that have nothing to do with how much cash the business throws off.
A $1.2M SDE business can trade anywhere from 2.5x to 6x or higher depending on what's underneath it. That's the difference between $3M and $7.2M on the exact same earnings number.
What actually moves the multiple#
Industry and growth trajectory. Buyers pay up for sectors with tailwinds (specialty healthcare services, certain B2B software, home services with recurring contracts) and pay down for sectors seen as commoditized or in decline. This isn't about fairness, it's about what a buyer can reasonably expect three years out.
Owner dependency. If the business runs through the owner's personal relationships, technical knowledge, or daily involvement, buyers discount hard. A business that runs without the owner in the building every day gets a materially higher multiple than one that doesn't, even with identical SDE. This is the single biggest lever most sellers ignore until it's too late to fix before going to market.
Customer concentration. One customer at 35% of revenue isn't a footnote, it's a risk factor buyers price directly into the multiple. A diversified customer base with no single client over 10 to 15% supports a meaningfully higher number than a business with a handful of large accounts.
Revenue quality. Recurring, contracted revenue trades at a premium over project-based or one-off transactional revenue. A business with 80% recurring revenue and a business with 80% one-time project revenue, at the same SDE, are not the same asset in a buyer's model.
Buyer type and deal structure. A strategic buyer folding the business into an existing platform will often pay a higher multiple than a first-time individual buyer using SBA financing, because the strategic buyer captures synergies the standalone buyer can't. Structure matters too: an all-cash deal usually clears at a lower multiple than one with seller financing or an earnout, since the seller is absorbing more risk in the second scenario and buyers price that risk transfer into the offer.
How to actually use this before you list#
Identify which of these five factors is dragging your multiple down.
Most businesses have one or two obvious weak points, not five.
Fix what's fixable in the 6 to 12 months before you go to market.
Diversify a concentrated customer base. Document processes so the business doesn't depend on your personal knowledge. Convert project work into retainer or contract arrangements where you can.
Get a real multiple estimate for your specific industry and size band
, not a generic "businesses sell for 3 to 5x" rule of thumb pulled from a different sector entirely.
Model your value at a range of multiples
, not a single number. Know what a 3.5x outcome looks like versus a 5x outcome, and understand which levers move you between them.
Where Openfair fits#
Openfair's free Business Valuation Tool factors in industry, customer concentration, owner dependency, and revenue quality alongside SDE, so sellers get a realistic multiple range for their specific business instead of a generic rule of thumb. The CPA-backed team can then walk through which of the factors above are actually worth fixing before you list.
The takeaway#
Your SDE tells a buyer what the business earns. The multiple tells them what it's worth to own. Get both right before you put a price on the table.
FAQ#
What's a "normal" multiple for a small business? There isn't one. Multiples vary by industry, size, and the risk factors above. A restaurant and a specialty software business with identical SDE will not trade at the same multiple, and neither will two businesses in the same industry with different customer concentration profiles.
Can I raise my multiple in a few months, or does it take years? Some fixes are fast (documenting processes, tightening contracts) and some take longer (diversifying a concentrated customer base). Owner dependency is usually the slowest to unwind since it means genuinely stepping back from daily operations, not just writing it down on paper.
Does a higher multiple always mean a better deal for me? Not necessarily. A higher multiple with an earnout tied to performance you no longer control can net out lower than a smaller multiple paid mostly in cash at close. Look at total expected proceeds and risk, not the multiple in isolation.
Should I try to negotiate the multiple directly? You negotiate price. The multiple is more useful as a diagnostic, it tells you and your advisor where the business is being discounted and whether that discount is justified or fixable before you go to market.
How do I know which factor is hurting my multiple the most? A CPA-backed valuation will usually flag it directly. If customer concentration or owner dependency shows up as a stated risk factor, that's almost always the first place to focus.