Ask what a small business is worth and the honest answer is a formula with judgment inside it: verified earnings times an industry multiple. Both halves matter. The earnings must be what tax returns can prove — not what the listing claims — and the multiple comes from ranges observed in actual transactions for that industry. The result is an estimate built from transaction benchmarks, not an appraisal; but it's the same arithmetic every serious buyer and lender starts from.
Here's what moves each half of the formula, and how to read the output.
The implied multiple: your fastest sanity check
Divide the asking price by verified earnings and you get the implied multiple — the multiple the seller is effectively asking you to pay. Compare it to the industry range. Inside the range, the price is defensible. Above the range isn't just "expensive" — it's appraisal risk: SBA lenders order an independent business appraisal and won't lend above it, so a price the benchmarks can't support becomes a financing gap you'll have to close with cash or a re-trade.
Risk flags that move the multiple
Two businesses in the same industry with identical earnings can deserve very different multiples. Buyers price risk, and four flags dominate:
- Customer concentration. When any single customer is more than 20% of revenue, losing them is an earnings crater. Expect a discounted multiple.
- A short lease on a location-critical business. A restaurant or retail shop with two years left on its lease is a business with two guaranteed years. The multiple compresses accordingly.
- Owner dependence. If the customers, the know-how, and the relationships all walk out the door with the seller, buyers pay less for earnings they're not sure survive the handover.
- Recurring contract revenue works the other direction: contracts and subscriptions make earnings predictable, and predictability commands a premium multiple.
Revenue trend: growth gets paid, decline gets discounted
The multiple range assumes a stable business. Buyers pay up for demonstrated growth and discount decline — a business shrinking 5% a year isn't worth the median multiple on this year's earnings, because next year's earnings are the ones the buyer actually receives.
Earnings growth: keep the assumption boring
Projecting future earnings is where valuations go to get inflated. Absent a concrete, funded plan, Main Street earnings typically track inflation — 2–3% a year. A projection assuming 15% annual growth "because the new owner will add marketing" isn't a valuation; it's a hope with a spreadsheet.
The 10-year projection view
Put it all together and the most useful picture is the long one: over ten years, the loan balance falls as the debt amortizes, cumulative free cash flow stacks up year after year, and the projected business value drifts with earnings. Watching all three lines at once shows what a deal actually builds — equity from amortization, cash from operations, and value from growth — and when each starts to dominate.
The free Deal Analyzer runs this whole framework on your numbers: it computes verified earnings, places the implied multiple inside your industry's range, adjusts for the risk flags above, and charts the 10-year view of loan balance, cumulative cash flow, and projected value. Treat every output as what it is — a benchmark-based estimate to guide negotiation, not a substitute for the appraisal your lender will order.
All figures are estimates for informational purposes only — not financial advice. Consult a qualified professional before making financial decisions.