What Is an Earnings Multiple and Why Does It Matter?
An earnings multiple is the simplest way to price a business. Take your annual earnings (SDE or EBITDA), multiply by a number, and you have an approximate value. A business earning $400,000 in SDE at a 3x multiple is worth roughly $1.2 million.
The multiple captures everything the market thinks about your business's risk and potential. Higher multiples mean buyers see low risk and strong growth. Lower multiples mean they see problems they'll need to fix. Understanding what drives your multiple gives you a roadmap for increasing your business value before going to market.
SDE vs. EBITDA: Which Multiple Applies to My Business?
SDE (Seller's Discretionary Earnings) is used for owner-operated businesses under $5M in revenue where the owner is actively involved in daily operations. It adds back the owner's salary and personal benefits to net income. EBITDA is used for larger businesses where a professional management team runs operations.
Use SDE If:
- Revenue under $5M
- Owner works in the business daily
- No paid management team
- Single-owner operation
Use EBITDA If:
- Revenue over $5M
- Paid management team in place
- Owner is more strategic than operational
- Multiple owners or investors
Typical Multiples by Industry in Michigan
These ranges are based on actual transaction data from BizBuySell, the IBBA Market Pulse Report, and DealStats for businesses with $1M-$10M in revenue. Your specific business may fall above or below these ranges.
| Industry | SDE Multiple | EBITDA Multiple | What Drives Premium |
|---|---|---|---|
| Manufacturing (Auto Supply) | 3.0x - 4.5x | 4.5x - 7.0x | OEM contracts, equipment quality, skilled workforce |
| HVAC / Plumbing / Electrical | 2.5x - 4.0x | 4.0x - 6.0x | Service agreements, licensed techs, recurring revenue |
| Healthcare / Dental | 3.0x - 5.0x | 5.0x - 8.0x | Patient base, payer mix, provider retention |
| Professional Services | 2.0x - 3.5x | 3.5x - 5.0x | Client retention rate, team depth, recurring engagements |
| Technology / SaaS | 4.0x - 8.0x | 6.0x - 12.0x | MRR, growth rate, net revenue retention, low churn |
| Construction / Trades | 2.0x - 3.5x | 3.0x - 5.0x | Contract backlog, bonding capacity, safety record |
| Retail / Distribution | 2.0x - 3.0x | 3.0x - 4.5x | Inventory turns, brand strength, supplier relationships |
| Food / Restaurant | 1.5x - 2.5x | 2.5x - 4.0x | Location, brand loyalty, management team |
Sources: BizBuySell Insight Report Q4 2025, IBBA Market Pulse Survey 2025, DealStats (formerly Pratt's Stats). Ranges represent middle 50% of transactions.
What Makes a Business Command a Higher Multiple?
Within any industry, the spread between the lowest and highest multiples is typically 2x or more. A $500K SDE business at 2x is worth $1M. The same business at 4x is worth $2M. The difference comes down to these factors.
- 1
Recurring Revenue
Businesses with subscription, contract, or repeat-purchase revenue models command 20-40% higher multiples than project-based or one-time-sale businesses.
- 2
Low Owner Dependence
If the business runs without the owner, buyers see a turnkey investment. If the owner IS the business, buyers see a job they're overpaying for.
- 3
Customer Diversification
No customer above 15% of revenue. Customer concentration is the #1 deal killer in small business transactions.
- 4
Growth Trajectory
3+ years of consistent revenue and margin growth signals market demand and operational excellence.
- 5
Clean Financials
Audited or reviewed financials with clearly documented add-backs. Messy books create uncertainty, and uncertainty gets priced as risk.
- 6
Scalable Systems
Documented SOPs, technology infrastructure, and processes that can support 2-3x current revenue without proportional cost increases.
Real Example: How Two Similar Michigan Businesses Got Very Different Prices
Consider two Metro Detroit HVAC companies, both with $3M in revenue and $600K in SDE. Company A sold for 2.3x ($1.38M). Company B sold for 3.8x ($2.28M). That's a $900,000 difference. Here's why:
Company A: 2.3x ($1.38M)
- Owner handled all sales and key accounts
- Top 3 customers = 45% of revenue
- No service agreements or recurring revenue
- Financials prepared by owner, not CPA-reviewed
- Went to market without preparation
Company B: 3.8x ($2.28M)
- Sales manager handled client relationships
- No customer above 8% of revenue
- 1,200 active service agreements (40% of revenue)
- CPA-prepared financials with 5-year history
- 18 months of exit preparation before listing
The lesson: your multiple is not fixed. It's the result of decisions you make 1-3 years before selling. See 7 Ways to Increase Your Business Value Before You Sell.
What Multiple Could Your Business Command?
Our free valuation tool estimates your multiple based on your industry, revenue, and key business characteristics. Get your free estimate.
Business Sale Multiple FAQ
What is an SDE multiple?+
Seller's Discretionary Earnings (SDE) is the total financial benefit to a single owner-operator, calculated as net income plus owner's salary, benefits, personal expenses, depreciation, amortization, interest, and one-time costs. The SDE multiple is the number a buyer multiplies by your SDE to arrive at a purchase price. For small businesses under $5M revenue, SDE multiples typically range from 1.5x to 4.5x.
What is an EBITDA multiple and when is it used?+
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) multiples are used for larger businesses, typically those with over $5M in revenue or $1M+ in EBITDA. Unlike SDE, EBITDA assumes a paid management team runs the business. EBITDA multiples for Michigan small-to-mid-size businesses range from 3x to 7x depending on industry, growth rate, and risk profile.
Why do some businesses sell for higher multiples than others?+
Higher multiples go to businesses with recurring revenue, diversified customers, strong management teams, growing margins, defensible market positions, and low owner dependence. Businesses with concentrated customers, owner-dependent operations, declining markets, or messy financials receive lower multiples. The spread between a 2x and a 4x multiple on a business earning $500K SDE is $1 million.
How do I find out what multiple my business would sell for?+
Start with industry benchmarks from BizBuySell, the IBBA Market Pulse Report, or DealStats. Then adjust for your specific characteristics: size, growth, profitability, customer concentration, and owner dependence. Our free valuation tool provides an initial estimate based on your industry and financials. For a defensible number, hire a Certified Business Appraiser.
Do Michigan businesses sell for different multiples than the national average?+
Michigan multiples are generally in line with national averages, with some industry-specific variations. Manufacturing and auto-supply businesses in Metro Detroit can command premiums due to the strong buyer pool and strategic value of Tier 1/Tier 2 supplier relationships. Healthcare and technology businesses also perform well. Retail and food service tend to track slightly below national averages.
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