Small Business Valuation Multiples

A framework for buying small businesses based on Sarah Moore's experience acquiring egg cartons.com with no money down.

Target Business Criteria

• Revenue: $4-20M ideal range
• EBITDA (Profits): Minimum $1.5M
• Valuation Multiple: 3-4x annual profits
  • Above average businesses closer to 4x
  • Below average businesses closer to 3x or 2x
• Track Record: Must show consistent profitability for several years

Key Business Evaluation Principles

• Industry is overrated

  • Don't limit yourself to specific industries
  • Focus on business fundamentals over industry trends
  • Look for consistently profitable businesses regardless of sector

• Most important factors:

  • Established business history
  • Consistent profitability over years
  • Simple, understandable business model
  • Strong customer base

Financing Structure

• Seller's Note: 25% of purchase price

  • Acts as substitute for equity
  • Paid over time with interest
  • Shows seller confidence in business

• Bank Financing: 75% of purchase price

  • Key is finding banks that view seller's note as equity
  • Bank gets priority over seller's note
  • Required talking to 20+ banks to find right fit

Deal Process Tips

• Keep terminology simple with sellers

  • Avoid complex financial jargon
  • Use basic terms like "income" instead of "EBITDA"
  • Build trust through clear communication

• Get price range agreement early

  • Discuss rough numbers before deep diving
  • Saves time if expectations don't align
  • Allows focus on serious opportunities

• Due diligence focus

  • Verify financial claims
  • Look for stable, proven performance
  • Understand core business drivers