How to price a business for sale.

Why pricing is a range, not a number

A defensible asking price is built from a methodology, not pulled from a feeling. The defensibility is what holds up at the negotiating table.

Most owners price their business in one of three ways: a rough multiple of revenue (we do $4M, so we are worth $4M), an emotional anchor (we want $3M because that is what we need to retire), or a comparable they heard about (Joe sold his business for 5x). All three lead to the same outcome: a number that does not survive contact with a sophisticated buyer.

The methodology buyers and lenders accept is earnings-based. Calculate the adjusted earnings of the business. Multiply by an industry-appropriate multiple. Adjust for the specific risk profile of the business. The result is a range, with a defensible mid-point.

Step 1: Calculate adjusted earnings

For businesses under $2M sale value, use SDE. For businesses above $3M sale value, use EBITDA. Between $2M and $3M, calculate both.

SDE (Seller's Discretionary Earnings) is net income plus owner salary, interest, taxes, depreciation, amortization, and discretionary add-backs (personal vehicle, family member compensation above market, one-time legal fees, and so on).

Adjusted EBITDA is earnings before interest, taxes, depreciation, and amortization, plus normalizing adjustments. Critically, EBITDA does not add back the cost of replacement management — if the owner currently makes $80K and a hired GM would cost $130K, EBITDA leaves the $50K gap there.

For a deeper walkthrough of the math, see how to calculate SDE and our complete valuation methodology guide.

Step 2: Apply an industry multiple

Multiples are industry-specific. Pull a multiple from the wrong industry and you will be off by 30 percent or more.

Once you have adjusted earnings, apply an industry-appropriate multiple. Below are general ranges for some common industries — these are starting points, not final numbers.

Industry	Typical SDE Multiple	Typical EBITDA Multiple
HVAC, plumbing, roofing	2.5x – 4.2x	4.0x – 7.0x
Self-storage	3.5x – 5.5x	6.0x – 11.0x
IT services / MSP	3.0x – 5.0x	5.0x – 9.0x
Manufacturing	2.8x – 4.5x	4.0x – 7.5x
Restaurants (independent)	1.5x – 3.0x	2.5x – 4.5x
Professional services	2.5x – 4.5x	4.0x – 7.0x

Step 3: Adjust for risk factors

Two businesses with identical earnings can sell for 50 percent different prices because of risk profile. This step is where the work is.

The four risk factors that move the multiple most:

• Customer concentration. Any single customer over 20 percent of revenue is a concern. Over 40 percent can drop the multiple by a full turn or more.
• Owner dependence. If the business loses 40 percent of its value when you leave, the multiple reflects that. Demonstrate that the business can run without you.
• Recurring revenue percentage. Contract-based or subscription revenue is worth more per dollar than project-based revenue.
• Growth trend. A business growing at 15 percent annually trades at a premium. A flat or declining business trades at a discount.

Worked example: pricing a $1.8M HVAC business

Assume an HVAC business with the following profile:

• Revenue: $4.2M
• Reported net income: $310K
• Owner salary (above market): $220K (market rate for the role is $130K)
• Interest: $35K
• Depreciation: $85K
• Personal vehicle expense run through business: $14K
• Largest customer: 12 percent of revenue (medium concentration)
• Growth: 9 percent annually over 3 years (low-medium)
• Recurring service contracts: 35 percent of revenue

SDE calculation: $310K net income + $220K owner salary + $35K interest + $85K depreciation + $14K personal vehicle = $664K SDE.

Multiple selection: HVAC baseline 3.0x. Adjustments: customer concentration medium (neutral), growth low-medium (+5 percent), recurring revenue moderate (+5 percent), owner dependence full-time (-5 percent). Net adjustment: roughly +5 percent. Final multiple: approximately 3.15x.

Valuation: $664K × 3.15x = approximately $2.09M.

That is a starting point for asking price. The defensible range is probably $1.85M (a buyer view) to $2.25M (a seller-friendly view).

Where the asking price sits

Set asking price at the top of the defensible range. Above it, buyers walk. Below it, you leave money on the table.

For the example above, asking $2.25M is reasonable. Asking $2.5M or $2.75M will likely scare off serious buyers — they recognize when asking price is not grounded in methodology. Asking $2.0M means you have already negotiated against yourself.

Common pricing mistakes

1. Pricing off revenue. Revenue multiples are a buyer-side sanity check, not a pricing methodology.
2. Inflating add-backs. Aggressive add-backs that do not survive diligence destroy trust in the entire presentation.
3. Ignoring deal structure. A $2M all-cash deal is different from a $2.3M deal with a $400K earnout and a $200K seller note.
4. Pricing for what you need, not what the business is worth. The market does not care what you need to retire.

Frequently asked questions