The cost of buying a small business depends primarily on the business's earnings, industry, and growth profile. The most common valuation method for small businesses (under $5M revenue) is the SDE (Seller's Discretionary Earnings) multiple.
Typical price ranges by revenue: - Micro businesses ($100K–$500K revenue): $100K–$400K purchase price - Small businesses ($500K–$2M revenue): $300K–$1.5M purchase price - Lower middle market ($2M–$10M revenue): $1M–$8M purchase price
What determines the multiple? Higher multiples go to businesses with recurring revenue, low owner dependency, growing revenue, diverse customer bases, and strong competitive moats. A plumbing company with no service contracts might trade at 2x SDE, while a pest control company with 85% recurring revenue might trade at 5x SDE.
Additional costs beyond purchase price: - Working capital injection (typically 10–20% of annual revenue) - Legal and accounting fees ($15K–$50K) - Due diligence costs (Quality of Earnings report: $15K–$40K) - Broker commissions (usually paid by seller, 8–12%) - SBA loan fees (if financing: 2–3.5% guarantee fee) - Insurance and licensing transfers
Example total cost: A business with $300K SDE selling at 3x = $900K purchase price. Add $100K working capital, $30K in professional fees, and $25K in SBA fees = roughly $1.05M total investment. With SBA 7(a) financing at 10% down, your out-of-pocket could be as low as $130K.