By Robert Frary · robertfrary.com
A few years ago, through my proprietary outreach process (cold calling, cold emailing, door knocking, etc.), I connected with the owners of a painting business in central Texas. They'd built something genuinely impressive - over a million dollars in annual revenue, hundreds of five-star reviews, a real reputation in their market. They were ready to retire and move out of state - they wanted to sell. I was pumped…my cold outreach worked and I found an off-market deal.
I evaluated the business, ran the numbers, and made an offer of around $600,000 - a 3x multiple on their SDE, which was not out of the ordinary at the time. Multiples in this space have moved up a bit since then. I told them directly that my number was my number, and that they of course had the option to shop it to other buyers who might offer more.
They understood how I got to the number - I walked them through the calculus. They didn't dispute the math. What they said was that the offer wasn't anywhere close to what they had imagined the business would sell for, and that at $600,000, they would not be able to retire and move out of state as planned. They were going to need to spend more years in the business.
Three years later now, and they're still in it.
I think about that conversation often, because those owners had spent years building a business, had done everything right in terms of reputation and customer relationships, and had no idea that the number in their head and the number a buyer would pay were going to be that far apart. Nobody ever taught them how this works. That's why I'm writing about it.
The mistake most owners make
When business owners think about what their company is worth, they almost always start with top-line revenue. They pick a multiple - usually something they heard somewhere, or something that feels right - and they do the math. Three times revenue, four times revenue - something like that - that's the number they carry around in their head.
The problem is that buyers don't buy revenue, they buy profit.
More specifically, they buy SDE - seller's discretionary earnings, which is the real economic benefit the business produces for its owner after everything is accounted for. That's the foundation of how small business valuation works. The multiple gets applied to SDE, not to revenue. A business doing a million dollars in revenue with $200,000 in SDE sells at a very different number (~$800k at a 4x multiple) than a business doing a million dollars in revenue with $500,000 in SDE (~$2M at a 4x multiple), even though the top line looks identical.
The painting business had strong revenue. Their SDE was around $200,000. At a 3x multiple, that gets you to $600,000. The math is straightforward. The gap between that and what they had imagined wasn't a negotiating problem - it was an information problem. They were devastated and I felt awful that I, of all people, was the one that brought them to this realization - it’s a weight I still carry and why I’m passionate about this. After buying a plumbing business and now operating it for 2+ years, I intimately understand the challenges of owning a business, and feel for other business owners who may not have the same information and insights I have.
Revenue can actually hide a weak business
After acquiring my plumbing business, I evaluated another plumbing business that was doing significantly more revenue than mine - close to twice as much. Based on revenue alone, it looked like a substantially larger and more valuable company. Again, I was pumped - I thought I found my next acquisition - an off-market plumbing business that would expand mine.
When I got into the actual financials, their SDE was roughly the same as mine. ~2x revenue, same profit. The business was operationally inefficient in ways that didn't show up on the top line at all. Since taking over my business, I've improved our SDE margin by approximately 165% through operational changes in a little over 2 years which means a business doing half the revenue was generating comparable earnings. What looked like a bigger business was, in the ways that actually matter for valuation, not a bigger business at all.
Revenue is the easiest number to know and the easiest number to talk about. It's also often the least useful number for understanding what a business is actually worth.
The one good year problem
Another version of this I ran into repeatedly during my search: owners who had one exceptional year - sometimes over a million dollars in revenue, well above their historical norm - and had anchored their entire valuation expectation to that year.
In their mind, the one good year wasn't an outlier. It was proof of what the business could do. It was the potential. The multiple, in their thinking, should then be based on that number. Right?
Buyers don't see it that way. A serious buyer looks at multiple years of financials and weights toward the trend. One strong year surrounded by average ones tells a story, but not the story the seller thinks it tells. It raises questions: was that year repeatable? What drove it? Is the underlying business growing or was that a one-time event? This was something I saw, somewhat uniquely here in Austin, due to the population boom reflected in the trades businesses I looked at here - practically all trades businesses here saw their highest numbers in the early 2020s and I had to be mindful of that, knowing it wasn’t the norm.
Buyers buy actuals. They buy what the business produces, consistently, over time. They do not buy potential - and they definitely (hopefully!) don't pay a premium for one year that didn't repeat.
Buyers buy actuals. They do not buy potential.
What actually drives value
If revenue isn't the driver, what is? A few things, in order of importance:
SDE - and the trend behind it. Not just what the SDE is today, but whether it's been growing, stable, or declining. A business with three years of improving SDE is worth more than a business with the same current SDE but a flat or declining history. Buyers are buying the future - the past is the evidence they use to predict it.
How dependent the business is on the owner. A business where the owner is involved in every customer relationship, every operational decision, and every piece of technical work is not transferable at full value. When the owner leaves, so does a significant portion of what makes the business run. Buyers price that risk - usually by paying less, requiring a longer transition, or walking away entirely.
Customer concentration. One customer representing 30% or 40% of revenue is a liability, not an asset. If that customer leaves after the sale, the business may not survive. Buyers know this and price it accordingly.
The stability and predictability of the revenue. Recurring revenue is worth more than project revenue. Contracted revenue is worth more than relationship-dependent revenue. Diversified revenue across many customers is worth more than concentration in a few. These aren't just qualitative observations - they directly affect the multiple a buyer is willing to apply.
Risk, broadly defined. Industry risk, competitive risk, key employee risk, regulatory risk. Any factor that could meaningfully change the earnings picture after a sale gets reflected in what a buyer is willing to pay today.
What the painting business owners needed to know
When I made that offer, I also told the owners I was open to a different structure - not just an acquisition, but a consulting arrangement where I could work with them on the operational and financial improvements that would make the business worth more to the next buyer, and in the process get them to the retirement number they actually needed.
They weren't ready for that conversation at the time, understandably so, but three years later they're still running the business. The gap between what a business is worth today and what it could be worth in two or three years is often very closeable, IF (that’s a big “if”) the owner understands what drives value and has enough runway to address it.
The owners who get the best outcomes are the ones who figure this out early - not in the middle of a sale process, and not after they've already told their family they're retiring and moving out of state. The earlier you understand how valuation actually works, the more time you have to plan and the more options you have.
If you're thinking about selling your business: I offer a straightforward first conversation where we look at your business through the lens of what a buyer would actually see - including what your business is likely worth today and what it would take to improve that number. No pitch, no pressure.