Divide publicly available industry multiples by four to estimate reasonable pricing for small businesses under $10M. Public market multiples reflect larger company valuations and overstate small business worth. Start by finding your industry's NAICS code and corresponding EBITDA multiple from sources like NYU Stern School data. For a business with $1.4M EBITDA in an industry with a 3x public multiple, divide by four to get a 0.75x small business multiple, suggesting a $1.05M valuation rather than $4.2M.

SDE measures the total financial benefit to a single owner-operator, including salary, benefits, and profit. SDE multiples scale with business size: $50K SDE commands 1.0-1.25x multiples, while $100K SDE jumps to 2.0-2.7x multiples. The critical threshold occurs around $100K SDE where multiples double. A $200K SDE business typically values at 2.5-3.0x ($500K-$600K), while $1M SDE reaches 3.25-4.25x ($3.25M-$4.25M). This scaling creates acquisition arbitrage opportunities.

Smaller businesses face a limited buyer pool, creating less competition and lower valuations. Public companies with 19x+ price-to-earnings ratios have millions of potential buyers, while small businesses may have dozens. Sub-$1M EBITDA companies trade at 2.5-5x multiples versus 7.5x+ for larger companies. Owner dependency, operational involvement requirements, and perceived risk further reduce small business multiples. This size discount creates opportunities for acquirers targeting smaller operations.

Owner-operated businesses automatically receive 1x SDE as baseline valuation since buyers purchase essentially a job requiring their operational involvement. This multiple can increase to 2x with strong financials. Professionally managed businesses where owners can leave for a month command 3.7x profit multiples. The key differentiator is operational dependency. If the business requires daily owner involvement, expect lower multiples. Professional management systems, documented processes, and operational independence justify higher valuations.

Use a three-tier research methodology for comprehensive valuation. Tier one: Find industry-specific transaction data for your exact business type. Tier two: Use broader category multiples when specific data unavailable (consulting companies trade at 0.75-1.25x SDE). Tier three: Apply general small business multiples adjusted for size. Combine EBITDA multiples with discounted cash flow analysis and asset-based approaches. Industry multiples provide benchmarks, but financing capacity and debt service coverage ratios determine practical valuation ceilings.

Valuation ceiling depends on debt service coverage ratio, not just industry multiples. With a 10-year note at zero percent interest, paying over 5x earnings creates uncomfortable positions where only half the profit services debt. At 10x multiples, buyers start behind with no cushion. Industry multiples represent what others paid under different circumstances, not necessarily what makes sense for your deal. Calculate maximum affordable price by ensuring adequate cash flow coverage after debt service, typically maintaining 1.25x minimum coverage ratio.

Cash transactions typically command 1x multiples for immediate lump sum payments. Terms deals offer 2-3x multiples paid over 2-4 years, providing sellers higher total value but extended payment risk. This spread creates negotiation leverage. Present both options: immediate cash at lower multiples or higher total value through seller financing. Many sellers prefer higher terms deals despite payment risk. Structure terms with appropriate security and performance milestones to protect both parties while maximizing business value.