Why do two businesses with the same earnings sell for different prices?

Earnings are one input to pricing a small business, not the whole answer. BDC describes market-based valuation methods that apply a multiple to a measure such as earnings before interest, taxes, depreciation and amortization, and says the multiple and ratio vary greatly with the industry, market conditions and other factors. So identical earnings can still lead to different prices. Anything said here about multiples is general discussion, not an appraisal of any business.

How the earnings were measured

The same headline figure can rest on different records. BDC lists what a valuator typically reviews: financial statements, the prior-year tax return, discretionary and non-recurring expenses, and management compensation. It also says buyers want a track record of past profits and solid growth prospects.

How safe the earnings look

Risk is one reason prices differ. BDC says you will not get full value if you are not maintaining your equipment or if there is customer concentration risk, and that a buyer facing a seller who cuts all ties may insist on a reduced price. Customer concentration is one of the issues BDC names, so two businesses earning the same amount can be priced differently on that ground. See what lowers the value of a business.

Who is buying and how they finance it

BDC says a strategic buyer is often willing to pay more because it sees synergies. BDC also lists availability of financing among the factors. The Canada Small Business Financing Program guidelines list goodwill as financeable when it is part of a going concern purchase, but say that acquiring shares is not eligible and that the part of a price a vendor finances cannot be covered by a program loan.

What the price actually includes

Two headline prices may describe different deals. BDC notes that a seller can stay involved after the sale through vendor financing, an earn-out or a phased transfer of ownership, and lists the seller’s post-transaction involvement among the factors that affect the final price. The CRA adds that a sales agreement may set a price for each asset, a value for the inventory and an amount for goodwill, and that selling assets can bring a recapture or a terminal loss of capital cost allowance. What a seller keeps can differ even when the price matches.