Key Insight
Most owner-operated small businesses transact between roughly two and three times seller's discretionary earnings, against public companies trading in the low teens on EBITDA. That gap is commonly described as a discount available to small-business buyers, but the larger part of it is a price for risk that cannot be diversified away. Aswath Damodaran of NYU publishes a measure called total beta, which restates industry risk for an investor holding a single asset rather than a portfolio. Across 89 industries with sufficient coverage the median conventional beta is 0.78 and the median total beta is 3.02 — roughly four times higher — because the median correlation between an industry and the broader market is only 0.25, meaning about 94% of the risk in a typical business is specific to that business rather than to the economy. A diversified fund holding hundreds of positions absorbs that; an owner-operator does not. Run through standard cost-of-capital arithmetic, that difference alone accounts for a substantial share of the multiple gap. What moves an individual multiple within the range is principally transferability: owner dependency, customer concentration, contract status and the presence of a management layer.
Most owner-operated businesses transact between roughly two and three times SDE, against public companies in the low teens. That gap is usually described as a discount available to small-business buyers. Most of it is a price for risk that cannot be diversified away.
This piece covers the typical range, what moves a multiple within it, and why Damodaran's total beta — a median of 3.02 against a conventional 0.78 across 89 industries — explains a substantial share of the gap through arithmetic rather than sentiment.
What is a good SDE multiple for a small business?
Most owner-operated businesses transact between roughly two and three times SDE. Businesses with strong transferability and diversified customers reach the upper end and beyond; owner-dependent businesses with concentrated revenue sit below.
The range is a starting point rather than an answer. A multiple is not good or bad in isolation — it encodes what a buyer is accepting. Three times earnings on a business where the owner personally holds every significant relationship is a worse purchase than four times earnings on a business that runs without them.
The more useful question is not what multiple is normal but what the multiple is pricing.
Most owner-operated businesses transact between roughly two and three times SDE. The multiple is not good or bad in isolation — it encodes the risk being accepted, not the quality of the purchase.
Why are small business multiples so much lower than public ones?
Because the buyer cannot diversify, and diversification is worth a great deal.
Public market multiples are set by investors holding hundreds of positions simultaneously. Risk specific to one company — a key employee leaving, a customer defecting, a lease repricing — largely cancels across a portfolio of that size. The investor is exposed only to what moves the whole market.
An owner-operator holds one asset, and nothing cancels.
Aswath Damodaran at NYU publishes a measure built for exactly this situation. Total beta restates industry risk for a completely undiversified investor. Across 89 industries with adequate coverage:
| Median | |
|---|---|
| Conventional (diversified) beta | 0.78 |
| Total (undiversified) beta | 3.02 |
| Correlation with the market | 0.25 |
The mechanism is that correlation figure. At 0.25, roughly 94% of the variance in a typical industry has nothing to do with the broader economy. It is firm-specific — the customer, the employee, the lease, the owner's health. A diversified holder absorbs it. A single owner carries all of it.
Because the buyer cannot diversify. Median total beta across 89 industries is 3.02 against a conventional 0.78, because median correlation with the market is only 0.25 — roughly 94% of the risk is firm-specific.
How much of the multiple gap does that explain?
A substantial share, on standard arithmetic.
Running both figures through a conventional cost-of-capital calculation — assuming a 4.5% risk-free rate, a 5% equity risk premium and 2% long-run growth — the diversified investor requires roughly 8.4%, supporting about 15.6x earnings. The undiversified owner requires roughly 19.6%, supporting about 5.7x.
Those assumptions are inputs rather than findings, and changing them moves the outputs. But the direction is robust: a difference of roughly 2.7x in supportable multiple, produced by nothing except whether the holder owns anything else.
The remainder of the gap to Main Street's two-to-three times is explained by factors that are genuinely discounts — illiquidity, a thin buyer pool, key-person concentration, and the absence of audited financials.
Which reframes the common claim. The gap between public and private multiples is not primarily an inefficiency available to be captured. It is mostly a price for risk that a single-asset owner actually bears.
On standard cost-of-capital arithmetic, a difference of roughly 2.7x in supportable multiple, produced by nothing except whether the holder owns anything else. The remainder is illiquidity, buyer pool and key-person concentration.
The reframe for a seller: A 2–3x multiple is not a judgment on the business. It is the market pricing a risk profile that is genuinely several times larger for an undiversified buyer than the comparable public figure implies. Explaining why holds deals together better than defending the number does.
What actually moves a multiple within the range?
Transferability, more than any other factor. The question a multiple answers is how much of the earnings survive the owner leaving.
Owner dependency. Where the owner performs sales, holds the customer relationships, or is the licensed professional, the earnings are partly a wage rather than a return on an asset. This compresses multiples more than any other single factor.
Customer concentration. A top customer at 40% of revenue is a different asset from one at 8%, at the same earnings. Whether the relationship is contracted or habitual matters as much as its size — see customer concentration risk.
Revenue durability. Revenue that repeats and revenue that is difficult to stop are different properties. Only the second one holds through a change in ownership.
Management depth. A business with a functioning second layer transacts at a different multiple from one where the owner is the only person who can price a job.
Earnings size. Larger earnings attract a wider buyer pool including financial buyers, which raises multiples independently of quality — part of why the SDE-to-EBITDA transition coincides with a step up in range.
Clean financials. Not a value driver so much as a precondition. Numbers that fail verification compress the multiple regardless of the underlying business.
Transferability above all: owner dependency, customer concentration and contract status, revenue durability, management depth, earnings size, and financials that survive verification.
Is a 3x multiple expensive?
It depends entirely on what is underneath it, which is the subject of when a 3× multiple is actually expensive.
The framing worth adopting is that the multiple describes the price and the transferability describes the risk. A low multiple on a fragile business is not a bargain, and a higher multiple on a durable one is not an overpayment. Comparing multiples across businesses without comparing what sits beneath them is the most common valuation error at this end of the market.
It depends entirely on what sits beneath it. The multiple describes the price; transferability describes the risk. Comparing multiples without comparing what they are attached to is the common error.
What this means in practice
Establish the earnings basis before the multiple. An SDE multiple and an EBITDA multiple are not interchangeable, and cross-applying them overstates value by roughly the multiple times the owner's salary.
Treat the public-private gap as information, not opportunity. Most of it prices a risk the buyer will actually carry.
Price transferability explicitly. Where earnings depend on the owner personally, that dependency is the valuation question. Structure — seller notes, earnouts and holdbacks — is where it gets allocated.
Sources and method
Total beta, conventional beta and correlation figures computed from Damodaran's published industry datasets (NYU Stern), restricted to the 89 industries carrying five or more constituent firms. These are derived from public-company data; applying them to privately held small businesses indicates the direction and approximate scale of the diversification effect rather than a specific beta for any individual business. Total beta is a cost-of-capital measure and does not indicate probability of failure. Cost-of-capital arithmetic uses stated assumptions (4.5% risk-free rate, 5% equity risk premium, 2% growth) and is illustrative rather than a valuation. Multiple ranges describe observed market convention and are not derived from a transaction database.
This article is general information, not financial, legal, tax, or investment advice. Figures vary by deal, lender, and jurisdiction. Consult a qualified CPA, transaction advisor, or attorney before relying on any analysis.
Avery Hastings, CPA
Founder, Acquidex • CPA • Tokyo, Japan
Avery Hastings is a CPA based in Tokyo, Japan and the founder of Acquidex. She focuses on helping buyers evaluate small-business deals with clear cash-flow logic, realistic downside analysis, and practical diligence frameworks.
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