Earnings Come First
Price starts with cash flow. For companies selling for less than about $2 million, brokers use seller's discretionary earnings, or SDE: what one working owner takes out of the company in total.
That is net profit plus your salary, payroll taxes on it, health insurance, a car the company pays for, interest, depreciation and true one time costs.
Once a company is large enough that a paid manager runs it, buyers switch to EBITDA. That measure assumes every role, including yours, is paid a market salary.
Then the Multiple
The earnings figure is multiplied by a number that reflects how risky and how transferable the company is. Many Main Street companies sell for around two to three times SDE. Larger, steadier companies earn higher multiples of EBITDA.
Two companies with the same profit can sell for very different prices. The multiple is where that difference lives.
What Moves the Multiple Up
- Recurring or contracted revenue, such as service agreements or multiyear contracts
- No client bringing in more than about 15 to 20 percent of sales
- Managers and senior staff who will stay after the sale
- Written processes, so the work doesn't depend on your memory
- Steady or growing results over the last three years
What Pulls It Down
- An owner who holds every key relationship and decision
- Books that don't match the tax returns
- A lease ending soon with no renewal option
- Revenue tied to one agency, one prime contractor or one contract that is up for rebid
Area Factors Buyers Weigh
Around the District, buyers pay close attention to government exposure. Revenue from federal work can be steady, but a contract nearing its end or tied to small business status can lower what a buyer will pay.
Labor matters too. Skilled staff are expensive and in demand here, so a team that is likely to stay adds real value. Rent is high, which makes a good long lease an asset.
Terms Change the Real Price
The headline number is only part of an offer. A buyer who pays most of the price at closing is offering more than one who pays the same total over five years through a seller note or an earnout tied to future results.
A good valuation call covers both: the likely price and the terms buyers in your field usually propose. That way an offer that looks high on paper doesn't catch you off guard.
What to Have on Hand
For a first conversation, rough figures are enough: yearly sales, profit and your own pay. For a full valuation, a broker will ask for three years of tax returns and financial statements, a list of equipment, and your major contracts and lease.
Our guides to specific company types explain what buyers check in different fields, and step by step shows how the free valuation works.
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