Selling a Business Part 1: Learn This Early

This article covers valuation multiples, the time required to plan an exit, and market timing.

Multiple of Profit v. Multiple of Revenue

Businesses are most commonly valued as a multiple of profit. Certain industries, such as accounting and tax practices, are valued by multiples of revenue instead — likely because costs are well known and consistent from business to business, or don't matter much to strategic acquirers who already know their own cost structure.

Multiples Increase With Size

In general, the larger the profit, the larger the multiple, across all industries. Larger businesses tend to have more time and money invested, better books and records, more employees, better management, and less risk.

Multiple of SDE v. Multiple of Adjusted EBITDA

Main street businesses are valued as a multiple of Seller Discretionary Earnings (SDE) — adjusted profit including an add-back for one owner's salary at market rate — showing a buyer their combined benefit from profit, salary, and perks. Larger businesses are valued as a multiple of adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which excludes owner salary. These larger businesses are typically bought by financial or strategic investors rather than individuals, and owner salary continues as an expense for the new owners regardless of who fills that role.

Multiples by Industry

Multiples can vary across industries, though multiples for mom-and-pop businesses under $1M in revenue (main street) tend to be similar regardless of industry, with some exceptions in tech. Multiples for larger businesses diverge more by industry. An IT Managed Services Provider (MSP) and an HVAC company, each with $100K in profit, might both sell at a low 1.5–2x multiple. But an MSP with $500K in profit might see a 5x multiple ($2.5M value), while an HVAC company at the same profit level might see 3x ($1.5M).

Unprofitable Businesses for Sale

Buyers are shopping for cash-flowing businesses. Most aren't interested in stopped or unprofitable businesses, since future profitability is conceptual — and selling before proving profitability sends a signal that achieving it has been difficult. Specialists who handle startups, pre-revenue, and pre-profit businesses need a deep network of strategic buyers to have any real chance of success.

Time Required to Sell

Most exit planners recommend starting exit planning ideally 5 years before an exit. Buyers want to see a minimum of 3 years of improving financials, clean books and records, systems, recurring revenue, repeatability, low owner dependence, and growth potential. The selling process itself can take 12 months or more even for main street businesses. For startup, pre-revenue, or pre-profit businesses, the window may need to extend to 36 months, with a much lower chance of success unless there's at least a positive revenue trend.

Timing of a Sale

Timing the market is never a good idea. Efforts to sell should be driven by the owner's personal needs and goals, not by waiting for favorable market conditions. That said, if market or industry conditions make a sale infeasible — insufficient demand, or an inability to achieve a price that covers debt — owners may need to keep building (if profitable) or close the doors (if bleeding cash with no clear turnaround).

Building Value

There are 8 value drivers that make a business valuable, used by Certified Value Builders to increase a business's worth. This framework is useful not only for endgame planning, but also for building resilience into a business's most valuable asset, even with no exit in sight:

• Financial Performance
• Valuation Teeter Totter
• Hub & Spoke
• Switzerland Structure
• Growth Potential
• Monopoly Control
• Customer Satisfaction
• Recurring Revenue

Related Terms: Multiple, Seller's Discretionary Earnings (SDE), Letter of Intent (LOI), Owner's Salary