For Business Owners
Two numbers set the price: what the business earns, and the multiple a buyer applies to those earnings. Most owners spend years on the first and never touch the second. The second is usually where the larger number is.
Almost every owner carries a number in their head. It came from somewhere — a rule of thumb heard at a conference, a competitor’s sale price as rumoured at a trade show, a broker’s opinion given free over lunch, or a quiet piece of arithmetic done alone one evening about what would be needed to stop working.
Those numbers are usually wrong in both directions. Some owners are carrying a figure well above what a buyer would pay. Others are sitting on a business worth considerably more than they assume, and are about to sell it cheaply because nobody told them what it could have been.
This page is about the second group, and about the distance between the two figures.
Businesses of the size we work with — roughly $5 million to $25 million of revenue — are almost always priced as a multiple of adjusted earnings. Earnings before interest, taxes, depreciation and amortisation, cleaned up for the owner’s personal expenses running through the company.
So the price is a simple product of two numbers:
Earnings × Multiple = Price
Owners work relentlessly on the left-hand number. Very few work on the right-hand one, largely because most have been told the multiple is fixed by their industry and therefore not their problem.
It is not fixed. It moves with the size of the business, and it moves with how risky the business looks to someone who has to run it without you.
This is the part that surprises people. Two businesses in the same industry, same margins, same market, get different multiples simply because one is bigger.
| Adjusted earnings | Typical multiple paid |
|---|---|
| Around $1 million | low 5× |
| $3 million to $5 million | 6.7× |
| $5 million to $8 million | 7.4× |
| Above $10 million | 8.3× |
GF Data, first three quarters of 2025, as reported for the lower middle market. Averages across many transactions; any individual business may price well outside these.
Read what that does. Taking earnings from $3 million to $5 million is a 67% improvement in profit. But it also lifts the multiple from 6.7× to 7.4×. The business goes from roughly $20 million to roughly $37 million — it nearly doubles. The extra profit did some of that. The rest was the re-rating that came with being bigger.
The published multiple is a starting point, not an offer. What a buyer actually pays is that number less whatever they think could go wrong once you have gone. Three deductions come up again and again.
If one customer is a large slice of your revenue, the buyer is not purchasing a business. They are purchasing a relationship, and it is your relationship.
| Largest customer, as a share of revenue | Typical effect on price |
|---|---|
| Under 10% | No discount |
| 10% to 20% | 5% to 10% off |
| 20% to 30% | 15% to 25% off, plus an earnout |
| Over 30% | 30% to 40% off, or no deal |
Published 2026 guidance on buyer treatment of concentration risk. Actual treatment varies by industry, contract length and the customer’s own credit quality.
There is a second cost that owners notice later. Concentration does not only lower the price, it changes when you get paid. Buyers move 30% to 50% of what would have been cash at closing into earnouts and escrow, released over eighteen months or more, and only if the customer stays. A headline of $30 million can arrive as $20 million at closing, $5 million contingent, and $3 million held back.
There is no fixed percentage for this one, and anyone quoting you a precise figure is guessing. What buyers do instead is apply a lower multiple, assume slower growth, and add the cost of hiring whoever replaces you.
The tests are unglamorous and easy to apply to yourself:
Buyers want evidence rather than assurances — retention data, management accounts they can rely on, documented approval limits, and ideally a period when the business traded perfectly well while you were not paying attention.
This is the quiet one, and it does the most damage per dollar of effort required to fix it.
Businesses with disorganised financial records are discounted anywhere from 10% to 40% of enterprise value. Conversely, clean and documented financials have been associated with valuations roughly 18% to 30% higher than otherwise comparable businesses. Same company. Different filing cabinet.
Worse, this is where deals die rather than merely get cheaper. Problems found in the buyer’s financial review — personal expenses that were never categorised, profit and loss statements that do not reconcile to the bank — account for a large share of transactions that collapse after terms have been agreed. Once a buyer’s accountants stop trusting the numbers, the price rarely recovers, even when the discrepancy turns out to be innocent.
This is the largest single lever on the page, and the one owners are least likely to have thought of as a valuation question rather than an operations one.
A buyer is not paying for last year’s profit. They are paying for their confidence in next year’s. Revenue that is contracted, subscribed, retained or otherwise repeats without being re-sold is worth substantially more than revenue that has to be won again every January.
Published comparisons put businesses with a high share of contracted recurring revenue at roughly one and a half to two times the multiple of an otherwise identical business living on project work. The threshold most often cited is around 70% of revenue contracted for the full effect; below about half, a business tends to price like a project business regardless of how good the projects are.
The same $1 million of profit is a different asset depending on where it comes from. Earned under multi-year agreements, it might fetch five or six times. Earned by winning individual jobs, three to three and a half. Nothing about the work changed. What changed is how much of next year the buyer has to take on trust.
Here is the same business twice. Nothing about the industry, the market or the customers changed. What changed is the list above.
| As it runs today | |
|---|---|
| Adjusted earnings | $2.2M |
| Multiple for that size | 5.5× |
| Starting point | $12.1M |
| Largest customer is 32% of revenue | −30% |
| Books need reconstructing before diligence | −10% |
| Indicative value | $7.6M |
| After three years of work | |
|---|---|
| Adjusted earnings — operations, pricing, two new service lines | $3.6M |
| Multiple for that size | 6.7× |
| Starting point | $24.1M |
| Largest customer now 14% of revenue | −7% |
| Reviewed financials, management team in place | no discount |
| Indicative value | $22.4M |
Illustration only, built from the published ranges cited above. It is not a projection, not a promise, and not drawn from any particular client. Any real business would price differently.
Now the part worth sitting with. Of the $14.8 million of additional value, only about $4.9 million came from earning more money. The other $10 million came from the multiple — from being bigger, and from removing the reasons a buyer had to discount.
Two thirds of the gain had nothing to do with profit. The effective multiple went from 3.5× to 6.2× because the business stopped looking fragile.
This is why “grow the business” is incomplete advice. Growth helps, and it helps twice over because it lifts the multiple as well. But an owner who spends three years purely chasing revenue, while remaining the only person who can price a job and while one customer still accounts for a third of sales, has left most of the available money on the table.
Every item on the list needs a history behind it before a buyer will pay for it.
A customer diversified last quarter is a claim. A customer diversified across three years of financial statements is a fact. A management team appointed in the run-up to a sale is a cost the buyer inherits. A management team that has demonstrably run the business for two years is a reason to pay more.
This is the single most common regret we hear from owners: not that they did the wrong work, but that they started it eighteen months before the sale instead of five years before, and only got credit for a fraction of it.
There is also a harder version of the same point. Buyers ask why you are selling, and they price the answer. An owner who has chosen the moment, from a business that has been prepared, negotiates from a position. An owner selling because of a death, a disability, a divorce, a falling-out between partners or a business in distress is negotiating from a position too — the other one. Nobody schedules those events, which is precisely the argument for doing the work while nothing is wrong.
It also explains a statistic that ought to be better known. Of the businesses that go to market, only around 20% to 30% actually sell. The rest do not fail because they were bad businesses. They fail because they were not sellable businesses, and nobody had checked which one they were until the buyer’s accountants arrived.
Meanwhile, roughly half of the American business market is owned by baby boomers who intend to transition within the next decade. Whatever else that means, it means the buyer will have choices.
We are not business brokers and we do not value businesses for a fee. What we do is sit on the owner’s side of a transaction that most owners go through exactly once.
Much of that conversation is about the business rather than the portfolio. We think that is the correct order. Advice about what to do with the money is not worth much if nobody checked whether the money was going to arrive.
Related reading: what you actually keep when you sell, on deal structure and tax. Exit planning, on the three questions that decide how a sale goes. And cash balance plans, on building wealth outside the business while you do all of this — so that the sale price matters slightly less.
Twelve questions across the three things that decide how a sale goes: whether the business is ready, whether the finances are ready, and whether you are. Scored separately, because an average hides the one that is about to break.
Three minutes, free, and your results are emailed to you.
Bayworth Capital serves clients across the North Shore and greater Chicago.