Is a business worth 3x profit? The honest answer is a range

Ask what a small business is worth and someone will tell you three times profit. It is the most repeated number in private markets, and it is not exactly wrong. Across 7,601 small-business transactions with a usable multiple in the Felpel Private Company Index, the median company cleared 2.67 times seller's discretionary earnings. BizBuySell's Q2 2026 Insight Report put the average cash flow multiple at 2.7 on a median sale price of $349,250. The IBBA and M&A Source Market Pulse survey for Q1 2026 reported median Main Street multiples of 2.0x SDE under $500,000, 2.8x SDE from $500,000 to $1 million, and 3.3x SDE from $1 million to $2 million. Three independent samples, three answers inside a rounding error of one another, all of them somewhere around three times profit. The rule of thumb survives. The problem is that it answers a question nobody is actually asking.

Nobody wants to know what the median business sold for. They want to know what theirs will sell for, and that is a different number with a much wider set of possible values. In those same 7,601 deals the middle half cleared between 2.0x and 3.4x SDE. That band is 1.4 turns wide, more than half the size of the median itself, and it only covers half the sample: a quarter of deals landed below it and another quarter landed above. I have priced more than a thousand private companies, and I have never once been able to answer the pricing question honestly with a single multiple. The useful answer is a range, a position inside that range, and the evidence that puts you there. Here is how to build one.

Every published source gives you the middle

Start by noticing how much agreement there is, because it is real and it matters. BizBuySell tracks closed transactions reported by brokers nationwide and put the average cash flow multiple at 2.7 in the second quarter of 2026, up 2 percent year over year, across 2,117 businesses sold. The IBBA and M&A Source Market Pulse is a quarterly survey of business brokers and M&A advisors, and its Q1 2026 Main Street medians climb from 2.0x to 3.3x SDE as deal size climbs from under $500,000 to $2 million. My own index, built from 7,601 marketplace and brokerage transactions with a usable EV/SDE multiple out of a database of 20,699 deals, lands at 2.67x. Different samples, different methods, same neighborhood.

That convergence is worth something. It means the center of this market is well measured and there is no serious argument about it. But a center is a fact about the market, not a fact about your company. Every one of those publishers knows that perfectly well. The point estimate is simply the part that survives the trip into a headline, a broker's pitch deck, or the answer a founder gets at a conference bar. By the time the number reaches the person who has to sign something, the distribution it came from has been thrown away.

The middle half runs 2.0x to 3.4x

Here is the distribution the rule of thumb discards. In the index the 25th percentile sits at 2.0x SDE, the median at 2.67x, and the 75th percentile at 3.4x. Read that band the way a buyer reads it: the same dollar of verified earnings buys a price of two dollars at the bottom of the band and three dollars forty at the top. Nothing about the earnings changed. Everything about the business around them did.

Notice what the interquartile range does to the rule of thumb specifically. Three times profit sits above the median and below the 75th percentile, which means a seller quoting it is already claiming an above-average business without having offered a single piece of evidence for the claim. That is not a scandal, it is just how anchoring works, and it is one reason listing prices behave the way they do further down this page. It also means the buyer who accepts three times as a starting point has conceded roughly a third of a turn before anyone opened a file.

What a turn and a half is worth in dollars

Multiples are abstract until you put earnings behind them, so take an illustrative business with $400,000 of seller's discretionary earnings that a buyer can verify. At the 25th percentile it is a $800,000 business. At the median it is a $1.07 million business. At the 75th percentile it is a $1.36 million business. The spread is $560,000 on identical earnings, which is more than half the value of the business at the middle of the band. This example is illustrative and uses the index percentiles rather than any specific transaction, but the shape of it is what shows up in real negotiations.

This is why the first question in a pricing conversation should never be what is the multiple. The multiple is an output. It is what you get after you have decided how durable the earnings are, how much of the business walks out of the door with the owner, and how many buyers are genuinely in the room. Ask for the multiple first and you have skipped every input that determines it, which is the same as asking for the answer and refusing to state the problem.

Sector narrows the answer less than you would hope

The natural next move is to look up your industry, and there is an entire genre of table built to serve exactly that impulse. It helps less than it looks. In the index the six sectors with a usable sample run from 2.42x SDE for e-commerce and consumer (n=4,584) through 2.86x for micro and online software (n=523), 3.09x for professional and B2B services (n=452), 3.35x for healthcare services (n=139), 3.36x for manufacturing and industrial (n=66) and 3.37x for retail and hospitality (n=479). That is a spread of under one turn across every sector in the file.

Now compare that to the spread inside a single sector. E-commerce alone runs 1.83x to 3.17x between its 25th and 75th percentiles, a 1.34 turn band, which is wider than the entire gap between the cheapest sector and the most expensive one. Retail runs 2.70x to 4.20x. Micro-SaaS runs 2.20x to 3.80x. Every sector range overlaps every other sector range. The industry you are in explains less about your price than where you sit within your industry does. An industry table implies the opposite, which is what makes it comforting and what makes it misleading.

Two honest caveats on that data before anyone builds a decision on it. This is an online and asset-light dataset with a marketplace and brokerage lineage: 98 percent of the EV/SDE sample is under $5 million, and roughly 60 percent of it is e-commerce. Seven of the twenty-three industry groups in the underlying database are excluded from the table above because the sample is too thin to publish. And the index deliberately does not record customer concentration, owner dependence, or whether an add-back survived a buyer's challenge, because the source records do not capture them per deal. Those three omissions are not a weakness in the data so much as an explanation of the spread. They are exactly the variables that decide where inside the band a real business lands, and no transaction database will ever hold them.

What actually moves you inside the range

1. Owner dependence. The single largest driver and the one no dataset records. If the business needs the owner to sell, to price, to hold the key relationships or to work sixty hours a week, then a buyer is not purchasing a company, they are purchasing a job with inventory attached. The fix is boring and slow: a second in command, documented processes, and customer relationships that survive an introduction email.

2. Revenue durability and concentration. Recurring beats repeat, repeat beats one-off, and contracted beats all three. A customer who represents thirty percent of revenue is a discount, not a reference. So is a channel: one Amazon category, one referral partner, one advertising account with the login held by an agency.

3. Books a buyer can verify. This is where the multiple quietly gets applied to a smaller number. Cash-basis books restated on an accrual basis, add-backs that arrive with support attached, and revenue cut-off that survives testing all decide what earnings the multiple lands on. I wrote up the mechanics separately in the piece on quality of earnings, because the adjustment gets multiplied and that is where most of the price movement after a letter of intent comes from.

4. Competitive tension. One buyer is not a market. In the IBBA and M&A Source Market Pulse for Q2 2026, 87 percent of deals over $5 million attracted at least three offers and 33 percent attracted ten or more. Multiple credible bidders is a pricing input, not a nicety, and it is one of the few inputs a seller can manufacture with process rather than with years of operating improvement.

5. Structure. A multiple is only comparable to another multiple if the money arrives the same way. The same Q2 2026 Market Pulse survey reported sellers receiving 83 to 92 percent cash at close on average. A headline 3.2x with a quarter of the price sitting in a seller note and an earnout tied to next year's performance is not the same deal as 2.9x in cash, and in most cases it is a worse one.

The asking price is the worst comparable in the file

There is one more reason the rule of thumb runs high, and it is structural rather than psychological. In the index, active listings ask about 3.26x SDE while verified-sold deals clear at about 2.58x, on a paired sample of 2,820 verified-sold transactions. Stated one way, listings ask roughly 26 percent more than comparable deals actually clear at. Stated the other way, the clearing price sits roughly 21 percent below the ask. Both framings come from the same two numbers, and it is worth saying which arithmetic you mean, because a careful reader will do the division.

The consequence is practical. Most freely available comparables are drawn from listings, because listings are public and closings are not, and almost every organization publishing them is a marketplace or a brokerage whose revenue depends on listings existing. An asking price is a marketing document. A clearing price is a transaction. If your comparable set is built from what similar businesses are asking, your range is high by roughly a fifth before you have made a single judgment call about the business in front of you. BizBuySell's Q2 2026 report also put median days on market at 155, which is a useful reminder that a listing price is a hypothesis being tested slowly, not a data point.

How to price with a range instead of a rule of thumb

The method I use is not complicated, and its main virtue is that it forces the judgment into the open instead of hiding it inside a single number. Start in your sector cell, not the all-deal median, and write down the sample size next to it, because a median built on 66 deals deserves less weight than one built on 4,584. Anchor on verified-sold, never on listings. Then place yourself inside the band with evidence: for each of the five drivers above, decide whether it argues for the 25th percentile, the median or the 75th, and write the reason next to it in a sentence someone else could challenge. Three drivers pointing down is a p25 business no matter how much the owner would like a three in front of the multiple.

Price the structure alongside the multiple, converting any note or earnout to what it is actually worth in cash today rather than counting it at face value. And finally, write down what would move you half a turn in either direction. That list is the most valuable output of the whole exercise. Half a turn on $400,000 of earnings is $200,000, which is usually worth more than any negotiating tactic available on the day, and unlike a tactic it can be earned in advance. If you are twelve months from a sale, the half turn is the plan.

A rule of thumb is a way of not doing that work. It is a reasonable summary of a market and a poor description of a company, and the gap between those two things is measured in hundreds of thousands of dollars on a business earning a few hundred thousand a year. The median is 2.67x. Your number is a range and a position inside it, and the position is the only part of it you control.

Common questions

Is a business worth 3 times profit?

Roughly, on average, and almost never precisely. Across 7,601 small-business transactions in the Felpel Private Company Index the median company cleared 2.67 times seller's discretionary earnings, and BizBuySell's Q2 2026 Insight Report put the average cash flow multiple at 2.7. So three times profit is a fair description of the middle of the market. It is a poor description of any single business, because the middle half of those 7,601 deals cleared anywhere between 2.0x and 3.4x SDE, and a quarter of deals landed below that band while another quarter landed above it. The rule of thumb tells you where the market sits. It tells you nothing about where you sit inside it.

What multiple do small businesses actually sell for?

The median across 7,601 transactions in the Felpel Private Company Index is 2.67x SDE, with a 25th percentile of 2.0x and a 75th percentile of 3.4x. Independent sources agree on the center: BizBuySell reported an average cash flow multiple of 2.7 in Q2 2026 on a median sale price of $349,250, and the IBBA and M&A Source Market Pulse survey for Q1 2026 reported median Main Street multiples of 2.0x SDE under $500,000, 2.8x SDE from $500,000 to $1 million, and 3.3x SDE from $1 million to $2 million. Read those together and the honest answer is a band, not a number.

How much is a business worth that makes $300,000 a year?

Illustratively, and assuming that $300,000 is genuine seller's discretionary earnings that a buyer can verify, the percentile band from the Felpel Private Company Index puts it at about $600,000 at the 25th percentile, about $800,000 at the median 2.67x, and about $1,020,000 at the 75th percentile. That is a $420,000 spread on identical earnings. Where a specific business lands inside the band is decided by owner dependence, customer concentration, whether the books survive verification, how many buyers are actually competing, and how much of the price is cash at close rather than a note or an earnout.

Does industry decide the multiple?

Far less than the industry tables imply. In the Felpel Private Company Index the median across six sectors with a usable sample runs from 2.42x SDE for e-commerce and consumer (n=4,584) to 3.37x for retail and hospitality (n=479), a spread of under one turn. A single sector's own interquartile range is wider than the gap between sectors: e-commerce alone runs 1.83x to 3.17x. Knowing the industry narrows the answer a little. Knowing the quality of the specific business narrows it a great deal more.

Why is the asking price higher than what businesses actually sell for?

Because an asking price is a marketing document and a clearing price is a transaction. In the Felpel Private Company Index active listings ask about 3.26x SDE while verified-sold deals clear at about 2.58x. Stated one way, listings ask roughly 26 percent more than comparable deals clear at. Stated the other way, the clearing price sits roughly 21 percent below the ask. Both are the same two numbers. The practical consequence is that comparables drawn from live listings are systematically high, and almost every free source of comparables is a marketplace or a broker whose revenue depends on listings existing.

Related reading

• Quality of earnings: the report that moves the price, and the adjustment that gets multiplied.
• How I price a company in 48 hours, including the normalized earnings bridge.
• What acquirers really pay for when they buy your company.
• A practitioner's guide to valuing a private company.

Go deeper

If you are pricing a business to buy or preparing one to sell and you want a defensible range rather than a rule of thumb, let's build it together: the sector cell, the position inside it, and the evidence behind the position. The underlying transaction data sits in the Felpel Private Company Index, and the valuation calculator is the fastest way to see the band against your own earnings.

Tomasz Felpel is an investor, founder, and advisor in private markets and healthcare, based in New York. He is a three-time founder of Value Alpha, an AI-powered private-markets valuation platform, Sonnerie VC, an early-stage healthcare venture firm, and Pond. Previously he led corporate development and M&A at Fortune 500 scale, pricing more than 1,000 private companies. Columbia Business School EMBA. Read the full story. This essay is educational and is not accounting, legal, or investment advice; engage qualified professionals for any transaction.