Business valuation rules of thumb by industry

A rule of thumb is a shortcut: businesses in a given industry tend to sell for a certain multiple of their earnings, so you can multiply and get a number in seconds. It is a useful starting point and a poor finish line. The industry multiple gives you a bracket; where your business lands inside that bracket is set by your own numbers. This page gives you the common rules of thumb by industry, then shows what actually moves your figure.

How business valuation rules of thumb work

Most rules of thumb express value as a multiple of earnings. For a small business, the earnings figure is seller's discretionary earnings (SDE): net profit plus the owner's pay, benefits, and one-off or personal add-backs, so a buyer can see what the business would actually pay them. Larger businesses are quoted on EBITDA instead, which is measured after paying a manager to run the place.

There are two families of rule. The common one is a multiple of SDE or EBITDA. The cruder one is a percentage of revenue. A word of caution before you multiply anything: do not mix metrics. An SDE multiple applies to SDE, not to revenue or EBITDA, and confusing them is the fastest way to a number that is wildly wrong. Across all small businesses, the average sits around 2.5 times SDE, with most falling between about 2 and 3.6 times. The average is the least useful figure here; the industry moves it, and then your own drivers move it more.

Rules of thumb by industry

These are typical ranges, expressed as a multiple of SDE, drawn from publicly available industry data and observed transactions. Treat them as a bracket to start from. Each links to a fuller breakdown of what sets the number in that industry.

Some industries also carry a well-known revenue rule: restaurants are often quoted at 30 to 40 percent of annual sales, accounting practices near one times annual billings, law firms at roughly 0.5 to 3 times revenue, and insurance agencies at 1.5 to 2.5 times renewal commissions. These are cruder than an SDE multiple, because they ignore how much of that revenue actually becomes profit. Two businesses at the same revenue with very different margins get the same wrong answer.

Ranges reflect publicly available industry data and observed transaction patterns. Your business's figure depends on its own earnings and drivers.

SDE beats revenue, and your drivers beat both

Think of rules of thumb as a hierarchy. A revenue multiple is the weakest, because it says nothing about whether the revenue turns into profit. An SDE multiple is better, because it starts from real earnings. And an SDE multiple adjusted for your drivers is the only one close to the truth.

The drivers are what separate two identical-revenue businesses in the same industry into opposite ends of the band: how much the business depends on the owner (the biggest one, because a buyer cannot buy you), how much of the revenue recurs, how stable the margins are, whether one or two customers carry the business, and how clean the records are. A rule of thumb cannot see any of these, which is exactly why it is a starting point and not an answer.

Using a rule of thumb without fooling yourself

Use the industry multiple for what it is good for: an order-of-magnitude range and a sanity check against an offer or an asking price. Do not use it to set your listing price or to make the decision to sell, because those need your real number. The way to get there is to start from your own SDE, apply your industry's range, and then adjust for your drivers.

For the full method behind these multiples, see how a small business is valued, or, if you are heading for an exit, what a business actually sells for.

Common questions