What is a valuation multiple and what does it mean for you?

Most owners have heard a number. Someone at a trade association dinner said HVAC businesses sell for “5 or 6x.” A friend sold his plumbing company for “3 times earnings.” An online calculator gave you a number based on your last year’s revenue. The problem is that none of those numbers mean the same thing, and if you don’t understand what goes into a multiple, you can’t tell which one applies to your business.

According to the IBBA Market Pulse Q4 2024, a survey of 368 business brokers and M&A advisors, main street businesses under $500,000 in enterprise value sell at an average of 2.0x SDE, while businesses in the $2 million to $5 million range sell at 5.3x EBITDA. That’s a wide range, and the difference between landing at the low end or the high end of your category can be hundreds of thousands of dollars.

Key Takeaways

• The formula is simple: Earnings x Multiple = Business Value. A 1x difference on $500,000 in earnings equals $500,000 more or less at closing.
• SDE and EBITDA are different earnings bases. The multiple and the earnings number must match or the math is wrong.
• Trades businesses sell at a wide range. HVAC averages ~8x EBITDA in 2025; plumbing under $1M revenue typically gets around 2x EBITDA.
• Owner dependency is the single biggest multiple reducer. Businesses that run without the owner sell at roughly double the multiple of ones that don’t, per IBBA data.
• Revenue multiples and earnings multiples are not interchangeable. Mixing them up is one of the most common sources of confusion in owner valuations.

What a valuation multiple actually is

A multiple is a shorthand for risk. According to IBBA Market Pulse Q4 2024, the average small business sells somewhere between 2.0x and 6.0x earnings depending on size, with most trades businesses landing between 2.8x and 5.3x. The formula itself is straightforward.

Earnings x Multiple = Business Value

If your business produces $500,000 in annual earnings and the market supports a 4.0x multiple for a business like yours, the valuation is $2,000,000. Change that multiple to 3.0x and the valuation drops to $1,500,000. Change it to 5.0x and it rises to $2,500,000.

That single number, the multiple, is doing $1,000,000 worth of work in either direction on a $500,000 earnings base.

Multiple	$500K Earnings	What changes
2.0x	$1,000,000	High risk, owner-dependent, inconsistent books
3.0x	$1,500,000	Average small business
4.0x	$2,000,000	Clean financials, some recurring revenue
5.0x	$2,500,000	Strong management, consistent growth, recurring contracts

The multiple is not arbitrary. It reflects how confident a buyer is that the business will still be earning that amount after you leave. Every risk factor they can identify reduces it. Every strength they can verify raises it.

SDE vs EBITDA: which number gets multiplied?

The earnings figure in the formula is not your net profit, and it’s not your revenue. According to Morgan and Westfield, a $1,000,000 SDE business at a 3.0x multiple and a $750,000 EBITDA business at a 4.0x multiple both produce the same $3,000,000 valuation. The metric and multiple must be matched correctly, or the math breaks entirely.

SDE (Seller’s Discretionary Earnings) is used for smaller businesses, typically those earning under $1 million, where the buyer plans to run the business themselves. It starts with net profit and adds back owner salary, owner benefits, personal expenses run through the business, interest, taxes, depreciation, and amortization. It represents the total financial benefit a full-time owner-operator receives.

EBITDA is used for larger businesses where the buyer will hire a manager. It adds back interest, taxes, depreciation, and amortization, but adds back only the portion of owner salary above what a market-rate replacement manager would cost (typically $150,000 to $300,000). The logic is that a buyer at this level is buying a business to run through hired management, not to replace you personally.

Your situation	Use this metric
Owner-run, under $1M earnings	SDE
Owner-run, $1M earnings, buyer is an individual	SDE
$1M+ earnings, professional management in place	EBITDA
Buyer is private equity or a corporation	EBITDA

See how EBITDA is calculated and when it applies

The three ways buyers calculate value

Buyers don’t all use the same method. Most trades and manufacturing business sales use the income approach, but knowing the other two explains why you might get wildly different numbers from different people. According to one case study from a fitness studio, the asset-based approach produced an $800,000 valuation while the income-based approach produced $2,100,000, a 163% gap for the same business.

Income-based (the most common method)

This is Earnings x Multiple. It’s how most trades business sales are priced because it captures the business’s actual earning power, including goodwill, customer relationships, and reputation. If your business makes $400,000 a year, that $400,000 is the starting point for the calculation.

Market-based (comparable sales)

This approach looks at what similar businesses sold for recently and applies those multiples to your numbers. About 100,000 private transactions exist in broker databases, and experienced brokers use this data to cross-check income-based valuations. It’s most useful when there are genuine recent comparables in your industry and size range.

Asset-based (almost always the lowest number)

This adds up the fair market value of all business assets minus liabilities. It captures your trucks, equipment, and inventory, but it captures none of your customer relationships, your reputation, or your recurring revenue. For a healthy, profitable business, asset-based valuation almost always produces the lowest number. It’s mainly used for businesses in financial distress or for pure asset sales where the business itself isn’t generating meaningful profit.

This is also why an online calculator that estimates value based on assets or revenue gives you a number that may mean very little. The income-based approach, applied with the right comparables, is what a buyer will actually use.

What multiples actually look like for trades businesses right now

Trades multiples vary significantly by industry, size, and buyer type. The IBBA Market Pulse Q4 2024, based on a survey of 368 brokers and advisors, gives a clear baseline by deal size. Industry-specific data from 2024 and 2025 shows even wider ranges within each trade.

IBBA Market Pulse Q4 2024 by deal size:

Enterprise Value	Typical Multiple
Under $500K	2.0x SDE
$500K to $1M	2.8x SDE
$1M to $2M	4.0x SDE
$2M to $5M	5.3x EBITDA
$5M to $50M	6.0x EBITDA

By trade:

HVAC businesses now average roughly 8x EBITDA in 2025, up from 3 to 5x before 2020, according to PKF O’Connor Davies and First Page Sage. Businesses in the $500,000 to $1 million EBITDA range tend to come in at 6.3x. Businesses with $1 million to $5 million in EBITDA are landing at 7 to 9x, driven largely by the premium buyers place on maintenance contract bases and smart home service capability.

Roofing businesses follow a different pattern. Under $3 million in revenue, buyers typically pay 3 to 5x EBITDA. From $3 million to $10 million, it rises to 5 to 7x. Above $10 million, the range is 7 to 9x. Storm and insurance work gets discounted 0.5 to 0.7x below retail recurring revenue, per Profitability Partners.

Plumbing is more compressed. Under $1 million in revenue, the typical multiple is around 2x EBITDA. Above $2.5 million, buyers are paying 3x and up. Median sale prices for plumbing businesses rose 45% from 2020 to 2024, according to GLBA Business Advisors.

Manufacturing in the lower middle market runs 5 to 8x EBITDA depending on what you make. Asset-heavy or commodity-focused manufacturers tend to fall in the 5 to 7x range. Manufacturers with engineered products and proprietary processes can reach 9 to 12x, per FOCUS Bankers.

For context, BizBuySell’s 2025 data shows the all-category main street average at 2.57x cash flow, with a median sale price of $350,000. That number includes every type of business and every level of preparation. A well-run trades business doesn’t have to land near that median.

What moves your multiple up (and what drags it down)

The IBBA data shows a concrete gap: owner-dependent businesses sell at 2 to 3.5x, while businesses with strong management teams sell at 5 to 7x. That’s the same earnings producing double the sale price, based on one factor.

What raises your multiple:

Recurring revenue is probably the most valuable thing you can build in the years before a sale. Maintenance agreements, service contracts, and annual inspection programs turn unpredictable project revenue into predictable cash flow, and buyers pay more for predictability.

Low customer concentration matters nearly as much. When no single customer accounts for more than 10 to 15% of revenue, buyers see less risk in the customer base surviving a change in ownership.

A business that runs without the owner daily commands the strongest premium of all. When the owner is the main estimator, main salesperson, and primary customer contact, buyers are essentially buying a job. When there’s a capable team in place, they’re buying a business.

Consistent year-over-year growth, documented processes, geographic diversification, and trained staff all add to the picture.

What lowers your multiple:

Owner dependency is the biggest single drag, worth restating. Customer concentration above 20% in any single account introduces meaningful risk that buyers price in. Declining or erratic earnings make it hard to establish a reliable earnings base. Deferred equipment maintenance, undocumented processes, and inconsistent financials each reduce what a buyer is willing to pay.

Read more about what drives the multiple up or down

How reducing owner dependency changes your valuation

The one number most owners get wrong

The multiple itself is where most owners start with a wrong assumption. Many have heard a number at a chamber event, from a friend who sold years ago, or from an online calculator that used revenue rather than earnings. Revenue multiples (typically 0.5 to 1x) and earnings multiples (typically 2 to 8x SDE or EBITDA) produce numbers that look nothing alike, and they’re measuring completely different things.

A business doing $2 million in revenue with $300,000 in SDE will sell for roughly $900,000 to $1.2 million on an earnings basis. An online calculator using 0.7x revenue would show $1.4 million. Neither the revenue calculation nor a vague industry quote tells you what your specific business will actually bring. The difference between those two numbers is real money, and it comes from applying the right multiple to the right earnings base using actual comparable sales.

If you’ve been quoted a multiple without a clear explanation of what earnings figure it applies to, the number doesn’t mean much yet.

The only reliable way to know where your multiple stands is to have a broker or valuation specialist run the numbers against real comparable sales in your industry. That conversation is free and takes less time than you’d expect. You can get matched with a broker who knows your industry here.

Why your valuation may have come in lower than you expected