What Multiple of Earnings Do Small Businesses Sell For in BC?

Owners and buyers often hear that businesses sell for a certain multiple of earnings. The idea is simple, but the right multiple for a particular business depends on its size, risk, industry and records.

This article explains what SDE and EBITDA mean, what tends to push a multiple up or down, and how a multiple becomes an asking price. It does not give a table of typical multiples, because a figure taken out of context can mislead both sides. A business broker, accountant or valuator can discuss market evidence for your type of business.

This article covers the law of British Columbia.

SDE and EBITDA in plain words

SDE stands for seller's discretionary earnings. It starts with the profit of the business and adds back the owner's pay, benefits and personal or one-time expenses, to show what one working owner could take from the business. It is often used for owner-operated shops, restaurants and service businesses.

EBITDA stands for earnings before interest, taxes, depreciation and amortization. It usually assumes the owner is replaced by paid management, so it is more common for larger businesses with a management team. Using the wrong measure for the business can distort the price, so be clear about which one is on the table.

What pushes a multiple up or down

A multiple reflects how risky the earnings look to a buyer. Factors that commonly matter include the following.

• How much the business depends on the owner personally.
• Whether earnings have been steady, growing or falling.
• How concentrated sales are among a few customers or suppliers.
• The quality of the books, since buyers pay less for earnings they cannot verify.
• The lease, the location and the length of time left on key contracts.
• The industry, the competition and how easily the business could be copied.

Hidden claims also lower what a buyer will pay. A prior lender's registration against business equipment, inventory or receivables can rank ahead of a buyer's claim. When a business is sold in whole or in part, an employee's employment is generally treated as continuous, so a buyer who takes over employees who stay takes on the seller's obligations to them, including past service for severance or compensation. There are exceptions: if the seller terminates employees before the sale, the seller owes their outstanding wages and compensation and the purchaser is not liable, and where a trustee in bankruptcy sells the business as a going concern, the buyer is not liable for wages owed before the bankruptcy. Unpaid PST can fall on a buyer who did not obtain a clearance certificate.

Turning a multiple into an asking price

The basic arithmetic is earnings multiplied by the multiple. An agreed measure of earnings, such as SDE, is multiplied by the multiple that both sides accept as fair for that business. The result is a headline price, not necessarily the amount the seller receives.

Several adjustments commonly follow. Debts secured against the assets may need to be paid off at closing, and a debtor or person with an interest in the collateral can give a written demand that the secured party amend or discharge a registration, which the secured party must register within 40 days. Inventory, equipment and land may be priced separately from the multiple, and the lease or land may raise separate issues. Anyone buying a business should have a lawyer confirm how these items are treated in the contract.

How structure and tax change the same price

On an asset purchase the price is allocated to each asset at fair market value, with the remaining balance attributed to goodwill, and the buyer's allocation should match the seller's. In a share purchase, the tax values of the corporation's assets do not change, and share purchases are generally not subject to GST/HST.

For asset sales, the parties may jointly elect on Form GST44 so that no GST/HST is payable when the buyer acquires all or substantially all (at least 90%) of the property needed to carry on the business. The election is unavailable where the supplier is a registrant and the recipient is not, and GST/HST can still apply to certain services, leases and licences.

A seller selling shares of a qualified small business corporation may be able to claim the lifetime capital gains exemption, which the CRA lists at $1,250,000 for dispositions after June 24, 2024, although the 2025 figure was listed as proposed and the qualifying tests should be confirmed.

What to do next

• Ask which earnings measure the asking price uses and request the adjustments in writing.
• Compare the multiple with sales of similar businesses, using advice from a broker or valuator.
• Run the PPR and other searches before you accept a price.
• Ask an accountant to model the tax result of an asset sale and a share sale.
• Have a lawyer review the letter of intent and purchase agreement before you sign.

Frequently asked questions