What is your business worth? Understanding multiples

What is my business worth? For a profitable small business, the price generally starts from normalized EBITDA, multiplied by a number that reflects the risk the buyer sees. That multiple isn't a fixed figure for your industry: it rises when the business runs without you, with varied clients, recurring revenue and solid documentation.

The basic formula: profit times a multiple

When a buyer looks at a profitable small business, they almost always start with the same question: how much money does this company produce each year, once corrected for its owner's quirks? That's normalized EBITDA: earnings before interest, taxes, depreciation and amortization, adjusted to remove what won't recur after the sale. An off-market owner salary, rent paid to your own real estate company at a friendly price, a one-time expense: all of that gets corrected.

Then they apply a multiple. The result is an enterprise value, before adjusting for debt, cash and working capital. That value isn't your cheque yet: the deal structure and the costs come after.

The multiple is the part owners understand least. You often hear "in my industry, businesses sell for so many times EBITDA." That's misleading. The multiple is the price a buyer is willing to pay for a given level of risk. There's no official number by industry, and we won't give you one here. What we can explain is what makes it move.

The five factors that move the multiple

1. Owner dependence

In a small business, it's often the heaviest factor. If the big clients call you, if every quote goes through you, the buyer expects losses after you leave. They compensate by lowering the multiple, paying part of the price later or asking you to stay. We cover it in detail in why buyers pay less for an owner-dependent business.

2. Client concentration

If one or two clients make up a large share of your sales, each possible departure becomes a major risk. The buyer looks at the share held by your top 5 and top 10 clients, how long those relationships have lasted and whether there are written agreements. Well-drafted client and supplier contracts ease that worry.

3. Recurring revenue

An annual maintenance contract, a subscription, a three-year framework agreement: that revenue is predictable. An order book rebuilt every month through phone calls is much less so. The more of your revenue comes back on its own, the more a buyer is willing to pay.

4. Growth

A buyer pays for the future. A business that grows steadily, with a credible plan and stable margins, is worth more than another with the same EBITDA that's flat. Erratic growth needs explaining.

5. Documentation

Written processes, clean financial statements, an organized data room: all of this cuts surprises during due diligence. Every surprise a buyer finds turns into a price cut or tougher terms. Documentation doesn't create profit, but it protects the multiple.

Same profit, two prices: a made-up case in Montérégie

Picture a company in Saint-Jean-sur-Richelieu that sells, rents and services forklifts. It doesn't exist, but the profile is a common one: eight million dollars in revenue, 28 employees, about a dozen of them mechanics on the road. After normalizing with her accountant, the owner, 61, lands on EBITDA of $1,000,000.

Suppose, for illustration only, that buyers look at her file as it stands today. She negotiates personally with the three largest clients, distribution centres that account for nearly half of sales. No agreement is in writing. Rental and service rates live in her head. A buyer might apply, say, a multiple of 4: an enterprise value of $4,000,000, with a good share as an earn-out.

Now imagine the same business three years later. A sales director holds the big accounts. Two clients have signed three-year agreements. Preventive maintenance contracts on client forklift fleets bring in revenue that comes back every month. The rate card is written down. EBITDA is the same, but the risk has dropped. If the multiple applied rose to 5, the value would be $5,000,000.

Those multiples are made up for the example. Real ones depend on each file and each buyer. What doesn't change is the mechanism: with equal profit, lower risk raises the price.

The multiple isn't the only method

A qualified valuator doesn't stop at the multiple. They also look at asset value, especially for a business that owns its building, a lot of equipment or significant inventory. They may discount expected cash flows, which forces you to defend credible forecasts. And, where possible, they compare with similar transactions. These methods cross-check each other. When they give very different results, it's often a sign of a risk the buyer will see too.

Your checklist this week

You don't need a valuator to start understanding where you stand. Take an hour and answer honestly:

1. Is your EBITDA normalized? Ask your accountant for the list of adjustments: your salary, personal expenses, one-time items.
2. What share of sales do your three largest clients represent? Also note who holds each relationship.
3. What share of your revenue comes back on its own? Contracts, subscriptions, framework agreements.
4. Can your growth over the last three years be explained in two sentences?
5. Can you leave for two weeks without anything stopping?
6. Where are your documents? Financial statements, contracts, procedures: one place, or everywhere?

Circle your two weakest answers: those are your first projects. Next to each, write the name of the person on your team who could start fixing it. The work of preparing the sale two years ahead is about tackling those levers in the right order.

What to keep in mind before talking price

Don't put a number in front of a buyer before you have a defensible range, established by a qualified valuator, such as a Chartered Business Valuator (CBV), from your normalized figures. Also have your tax advisor confirm the consequences of a share sale versus an asset sale: the headline price and what ends up in your pocket are not the same thing. The costs of selling a business and the deal structure weigh in too.

Finally, the multiple isn't negotiated on its own. Vendor financing or an earn-out can raise the total price, as long as it's well framed. That's what step 8: sell at the right price is all about.

Do it with a pro

Alone, figuring out what weighs on your multiple takes months of back-and-forth with your advisors, and it's hard to see your own blind spots. With us and our regional partner, the levers are measured in a few weeks, then worked on while you keep running the business. Our fees are almost entirely tied to results and mostly paid after the sale, so starting early costs you almost nothing upfront.

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