There is no exchange setting a price here. The multiple applied to SDE is a negotiated number that moves with customer concentration, revenue durability and how replaceable the owner is - and it sits far below public-market multiples for reasons that have nothing to do with the quality of the business.
11 min read · Level 3
I think the most useful mental shift a buyer can make in this subject is to stop asking "is this multiple fair" and start asking "what specific risk is this multiple pricing, and do I actually believe it is as large as the market thinks." A 1.8x multiple on a concentrated business is not an insult to the business - it is the market's honest attempt to price the chance that one phone call ends 60% of the revenue, and a buyer who genuinely believes that customer relationship is more durable than the market assumes, and can verify why, has found a real edge rather than a bargain that appeared by accident. Most of the time the market's scepticism is earned and the discount is correctly sized. Occasionally a buyer who actually knows the industry can see that a concentration or a lack of contracts looks worse on paper than it behaves in practice, and that gap between the priced-in risk and the real risk is close to the only source of genuine outperformance available in an asset class with no public market to arbitrage against.
A public company's shares trade continuously, so a price exists whether or not anyone particularly wants to transact today. A small business has no such thing. Its price is whatever a specific buyer and a specific seller agree to at one moment, informed loosely by what similar businesses have sold for - and the gap between that number and a public-market multiple on the same earnings is enormous, for reasons that say nothing about whether the business itself is good.
Same 200,000 of earnings, priced two ways A private-equity-scale multiple (roughly what a professionally run, mid-size company might fetch) 6.0x = 1,200,000 A typical independent small-business SDE multiple, low end 2.5x = 500,000 A typical independent small-business SDE multiple, high end 3.0x = 600,000
The same 200,000 of underlying profit is worth somewhere between roughly 500,000 and 600,000 as a small, owner-dependent business and roughly 1,200,000 at a scale where a management team, audited financials and a liquid buyer pool exist. That gap - 600,000 to 700,000 on identical earnings - is not a mispricing anyone is likely to correct. It is the size and liquidity discount this entire asset class trades at, and understanding where it comes from is most of what "pricing" means here.
Within the small-business range itself, the multiple moves on a small number of identifiable factors, and customer-concentration is usually the largest single lever. Consider two businesses with an identical 150,000 SDE:
Business A - diversified customer base, no customer above 10% of revenue 3.0x = 450,000 Business B - one customer at 60% of revenue 1.8x = 270,000
The difference - 180,000, or 40.0% of Business A's value - exists purely because Business B's earnings are one lost contract away from collapsing, regardless of how good the product or the service is.
A second lever is how the earnings are produced: recurring, contracted revenue commands a real premium over one-time or discretionary sales, because it is more predictable and more transferable to a new owner. On the same 150,000 SDE, a business built on subscription or service contracts might command 3.5x (525,000) against 2.5x (375,000) for a comparable business selling one-off transactions - a 150,000 gap, which is 28.57% of the higher figure.
A third lever is how dependent the business is on the current owner personally, which is where semi-absentee-ownership comes in: a business already run day to day by a general manager, with the owner one step removed, is worth more per dollar of SDE to most buyers than one where the SDE only exists because the owner works sixty hours a week - because the first is closer to a genuinely passive investment and the second is, per lesson one, mostly a job.
The size-and-liquidity gap matters because it explains something that otherwise looks like an anomaly: two businesses that are, in every operational sense, equally well run can be worth wildly different multiples of the same profit purely because of scale. A valuation-multiple compresses an entire risk picture into one number, and at small scale that risk picture is dominated by things that have nothing to do with management quality - there is no ready pool of comparable-companies trading publicly to anchor a price against, there are far fewer potential buyers able to finance a purchase this size, and the illiquidity-discount on an asset that might take a year or more to sell, with no guaranteed buyer at any price, is baked into every multiple quoted in this subject.
Customer concentration deserves the weight buyers give it because a lost contract is not a gradual decline - it is often an immediate, permanent step down in revenue, and a lender or a buyer sizing a purchase against last year's numbers has no protection against it happening the month after closing. The 40.0% discount in the worked example above is not an arbitrary penalty; it is a rough attempt to price the probability and severity of exactly that outcome.
Recurring revenue earns its premium for a related but distinct reason: it is the closest thing this asset class has to a forecast a buyer can actually trust, because the revenue is contracted rather than re-earned from scratch with every customer interaction. A business selling on relationships and reputation, one transaction at a time, is transferring a much less certain thing to a new owner than one collecting the same monthly fee from the same list of accounts.
And semi-absentee status is the clearest illustration of lesson one's whole argument playing out in a price. A business that has already separated the job from the capital - because someone other than the owner is doing the job - is genuinely closer to being an investment rather than an occupation, and buyers who want passive income correctly pay more per dollar of SDE for that separation, even though the underlying business may be identical in every other respect to one the owner runs personally.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
One landscaping business, valued three different ways depending on which single fact changes.
The base case. SDE of 180,000, diversified customer base of roughly 200 residential and small-commercial accounts, no account above 8% of revenue, owner-operated, mostly one-off and seasonal contracts. Market multiple for this profile: 2.6x. Value: 180,000 x 2.6 = 468,000.
Change one fact: concentration. Same 180,000 SDE, but 55% of revenue comes from a single commercial property-management contract renewable annually at the counterparty's discretion. Market multiple drops to roughly 1.7x to reflect the concentration. Value: 180,000 x 1.7 = 306,000 - a fall of 162,000, or 34.62% of the base-case value, from one fact about who pays the bills.
Change a different fact: recurring contracts and a working general manager. Same 180,000 SDE, but built on renewable annual maintenance contracts with no single customer above 10%, and already run by a salaried general manager while the owner visits twice a month. Market multiple rises to roughly 3.4x, reflecting both the recurring-revenue premium and the semi-absentee premium together. Value: 180,000 x 3.4 = 612,000 - 144,000, or 30.77%, above the base case.
Three businesses, identical 180,000 SDE, valued at 306,000, 468,000 and 612,000 - a spread of more than two to one on the same reported profit. None of these numbers is wrong. Each one is pricing a different set of risks that the SDE figure itself cannot see, which is exactly why lesson four's evaluation checklist exists: the multiple you should pay depends on facts the earnings statement does not report.
Comparing a small-business asking multiple against a public-market price-earnings ratio and concluding the small business is dramatically cheap. The gap exists for structural reasons - illiquidity, scale, the absence of a management team, the absence of audited numbers - not because small businesses are systematically mispriced bargains.
Treating the multiple as a fixed number for an industry rather than a starting point that moves substantially on customer concentration, revenue durability and owner dependence. Two landscaping businesses can trade a full turn of SDE apart from each other for reasons that have nothing to do with which one does better work.
Paying a semi-absentee-level multiple for a business that is not actually semi-absentee. If the SDE was produced by the owner personally working full time, paying a price that assumes a manager is already in place double-pays for something that has not yet happened.
Ignoring customer concentration because the top customer "has been loyal for years." Loyalty is a fact about the past; concentration risk is a fact about what happens to the business the day that relationship ends, for any reason, including ones that have nothing to do with satisfaction.
List the top five customers as a percentage of total revenue. A single customer above roughly 20-25% of revenue should move the conversation directly to a lower multiple, regardless of how the seller frames the relationship.
Ask for a schedule showing which revenue is under contract, on a subscription, or otherwise likely to repeat automatically, versus revenue that has to be re-earned from scratch each time. The proportion that is genuinely recurring should shift the multiple you are willing to pay.
If a general manager or lead staff member is already running day-to-day operations and being paid a market wage inside the reported figures, the business deserves a higher multiple than an identical one that only functions because the owner shows up. If it does not, do not pay as though it does.
A brokers' association average multiple for "landscaping businesses" nationally is a starting anchor at best. A handful of actual recent sales of similar-sized businesses with similar customer profiles in a similar market tell you far more about what this specific business should sell for.
Whenever comparing an asking multiple against similar listings, and whenever a seller or broker presents a single industry-average multiple as if it applies without adjustment to this specific business.
Do not use a customer-concentration discount mechanically without also asking how switchable that customer relationship actually is - a concentrated but multi-year contracted relationship with real switching costs for the customer is a different risk from a concentrated relationship that could walk with thirty days' notice, even though both look identical as a percentage of revenue.
Industry rules of thumb for small-business multiples are widely quoted as single figures - "landscaping businesses sell for two and a half to three times SDE" - and are frequently treated by first-time buyers as a fixed price rather than a range with real spread inside it. In practice the businesses that sell at the low end and the high end of a stated range are rarely random; they cluster on customer concentration, contract durability and owner dependence in ways a buyer who only remembers the headline range never sees. The rule of thumb is not wrong, but treating it as a single number rather than a range explained by these specific factors is where most first-time overpayment actually happens.
Ask why a specific listing sits where it does within its industry's typical multiple range, not just what the range is.
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