What drives a business valuation multiple

A buyer is not pricing last year’s revenue, or even last year’s profit — they are pricing a claim on cash flow that has not happened yet, discounted for everything that could interrupt it once the current owner is gone. That is what an earnings multiple actually is: a price on risk, built factor by factor rather than looked up in an industry table. Two businesses with identical revenue and near-identical profit can carry very different multiples once a buyer works through how much of that profit is genuinely likely to keep arriving after closing. Owner dependence, customer and supplier concentration, how much revenue actually repeats, how durable the margin is, how credible the growth trend is, whether the licences and relationships that make the business valuable actually survive a change of hands, how clean the records are, and how many real buyers could close the purchase — each of these moves the number on its own, and a seller can improve most of them before a business ever goes to market.

A multiple prices risk — it is not looked up

Deavo does not maintain a current Canadian database of what businesses like yours actually sold for, and no one else does in a form worth trusting either: closed private-company transactions are confidential, and the counts that circulate publicly are almost always asking prices, not results. What gets discussed instead — by brokers, accountants and buyers alike — are general patterns in earnings multiples for a given size and sector, adjusted by judgment for the specific business in front of them. An asking multiple is simply the number a seller sets before any of that judgment has been applied by a real buyer; it is a starting position, not a prediction of the closing price, and everything below is what actually moves a genuine offer toward it or away from it. How that judgment actually gets applied — normalizing the earnings figure, choosing between an income, asset or market approach, deciding whether an informal opinion or a formal report from a Chartered Business Valuator is warranted — is its own subject, covered in how to value a business in Canada. This page is about the layer underneath that process: the specific, checkable factors that push a given business toward the strong end of whatever range applies to it, or the weak end.

Even the type of multiple in play changes with the business. Most small, owner-operated businesses are priced off a multiple of seller’s discretionary earnings, for the reasons set out in what multiple do small businesses sell for in Canada — and that page is also a useful reminder that quoted averages mislead more than they inform, because the range moves entirely with the factors below. A fast-growing subscription business, by contrast, is commonly discussed in terms of a multiple of annual recurring revenue instead of earnings, which is why what multiple does a SaaS business sell for runs on a different logic entirely: growth rate and retention take over as the driver, ahead of the earnings adjustments that dominate everywhere else. And where the number has to hold up to real scrutiny — financing, a shareholder dispute, an estate — a quick multiple-based estimate stops being enough; a multiple-based estimate vs a formal appraisal sets out when a formal appraisal is the right tool instead.

Owner dependence

The mechanism here is straightforward: a buyer is not really acquiring a business if the business cannot function without the person selling it — they are acquiring a job with a purchase price attached, and a lender underwriting the purchase reasons the same way. Buying an owner-dependent business carries a distinct diligence problem on the buyer’s side, and key-person dependency is the mirror problem on the seller’s side; both describe the same fact from opposite ends of the table, and the language shows up throughout this library as owner dependence and key-person risk. The less a business can run without its current owner, the smaller the share of its earnings a buyer treats as reliably theirs once ownership changes, and that shows up directly in what they are willing to pay for those earnings.

What a seller can actually do about it starts well before a listing goes up: moving customer, supplier and lender relationships onto other people in the business, documenting the decisions only the owner currently makes, and putting someone else in a position to run day-to-day operations are the concrete steps how do I reduce owner dependence walks through. A written retention agreement for whoever would actually run the business after closing — the subject of key employee retention agreements — gives a buyer something to underwrite instead of a promise, and testing the arrangement by genuinely stepping back for a real stretch of time before a sale is the only way to know whether it holds.

Customer and supplier concentration

A business where a handful of customers account for most of its revenue carries a risk a buyer can quantify almost immediately: losing one relationship during or shortly after a change of ownership can erase a disproportionate share of the earnings the price was based on. Treadstone Law’s discussion of customer concentration risk in a business sale sets out why this is treated as one of the more reliable multiple-killers on the selling side, and the same risk runs the other way — its counterpart on customer concentration risk in a business purchase is what a buyer’s own advisors are checking for before they ever make an offer. Should I worry about customer concentration and the customer-concentration glossary entry cover how much concentration actually matters and why there is no fixed percentage that decides it on its own; supplier-concentration is the mirror risk sitting on the buying side of the business rather than the selling side.

Concentration is made worse, not better, when the underlying contracts cannot actually move with the sale. A supply agreement or a major customer contract that requires the other party’s consent to assign — the subject of Treadstone Law’s piece on anti-assignment clauses in supplier contracts — turns a concentration risk into a transfer risk: the relationship the price depends on might not legally follow the business into new ownership at all without that consent. A seller preparing to list is better off knowing which key contracts fall into that category before a buyer’s lawyer finds it during diligence, not after.

Revenue recurrence and contract quality

Revenue that repeats on its own — a subscription, a service contract, a customer base that reorders on a known cycle — is easier for a buyer and a lender to underwrite than revenue that has to be won fresh through new sales every period, because the future cash flow is more predictable and therefore less risky to finance. Recurring revenue sets out the mechanics; the clearest real-world case of what recurrence does to the number is what multiple does a SaaS business sell for, where growth and retention drive a revenue multiple that behaves nothing like an earnings multiple.

Quality matters as much as quantity. A contract’s term length, its renewal terms, and whether it is genuinely assignable to a new owner all decide how much a given piece of recurring revenue is actually worth to a buyer — a one-year agreement that auto-renews on a notice date the seller is likely to miss is a materially weaker asset than the same dollar figure locked in for three years with assignability already confirmed, the exact question Treadstone Law’s piece on assignable contracts is built around. Reviewing exactly this, contract by contract, before a business goes to market is one of the more mechanical, and more overlooked, ways to defend a multiple.

Margin durability

Two businesses with the same revenue and the same reported profit are not the same purchase if one holds its margin under pressure and the other does not. Gross margin measures how much of every sale survives the direct cost of delivering it — the first thing a buyer checks for pricing power — while EBITDA margin measures how much survives everything else. A buyer discounts a business whose margin has been drifting down over several years far more than one whose margin has simply been flat, because a declining margin says something is eroding that a single strong final year will not fix.

Margin only means what it claims to mean if the earnings figure underneath it is trustworthy. SDE and EBITDA explained for business buyers is exactly the adjustment a buyer runs before they believe a margin number at all, and Treadstone Law’s companion piece on add-backs and seller’s discretionary earnings is the seller-side discipline that makes that adjustment defensible instead of suspicious. A margin propped up by cutting real costs — deferred maintenance, understaffing, a marketing budget switched off — in the year before a sale is a pattern buyers are specifically trained to look for, and it tends to cost more in credibility than it adds to the number.

Growth trajectory and its credibility

A buyer weighs several years of history far more heavily than the most recent one, because a single strong year could be a genuine shift or a one-off that will not repeat, and there is no way to tell the difference from the number alone. What drives a higher multiple covers this same trend-line effect as one item on a shorter, ranked list; what follows here is what actually makes a growth trend credible enough for a buyer to underwrite rather than discount.

The test a buyer applies is whether the growth has a traceable cause: a new location, a price increase, a contract win, a channel that scaled — each of these can be explained, checked and reasonably projected forward. Growth with no obvious cause, or growth concentrated in the twelve months right before a listing goes up, is treated as the least reliable kind, for reasons that overlap heavily with what are the biggest risks when buying a business. A seller who can document where growth actually came from is giving a buyer a forecast instead of a hope, and that documentation is worth preparing well before anyone asks for it.

Transferability of licences and relationships

A multiple prices what the buyer will actually have on day one, not what the seller currently has — and licences, permits and registrations tied personally to the current owner, or requiring a third party’s consent to move, are where that gap shows up hardest. In Ontario, transferring a liquor sales licence runs through a defined Alcohol and Gaming Commission of Ontario process rather than happening automatically on closing; other provinces run their own liquor, food-premises and professional licensing regimes, each with its own transfer mechanics and timeline. A franchised location adds a further layer under Ontario’s Arthur Wishart Act and the franchise agreement itself: Treadstone Law’s articles on franchisor consent to transfer and a franchisor’s right of first refusal both describe ways a franchisor can slow, redirect or step into a sale that would otherwise be straightforward between buyer and seller — provinces without their own franchise-specific legislation still leave this governed by the agreement, so the answer is never automatic.

Relationships carry the same risk in a softer form. A customer or referral relationship that transfers on paper but stays loyal to the departing owner in practice has not really transferred at all, which is exactly why a seller’s non-compete matters — how long a seller’s non-compete can last in an Ontario business sale sets out the boundaries Ontario courts will actually enforce, and enforceability rules and reasonable-duration norms differ elsewhere in Canada. The practical response is the same as with owner dependence: inventory every licence, permit, franchise consent and key relationship the sale actually depends on, and start the consent conversations early enough that they are resolved, not merely identified, by the time a buyer is at the table.

Quality of records

A business whose earnings are undocumented, inconsistent with its own tax filings, or supported by an add-back list a buyer cannot verify does not get the benefit of the doubt — it gets discounted for the uncertainty, whether or not anything is actually wrong. Treadstone Law’s guidance on cleaning up financial statements before selling is written from exactly that seller-side problem, and how to read a business’s financial statements before you buy is the buyer-side mirror: the same records are being read from both directions, and a seller who has not anticipated the buyer’s read is negotiating from behind before the conversation even starts.

Two fixes are worth doing before a listing goes up rather than after an offer arrives. Engaging an accountant before selling a business to reconcile the books to what was actually filed removes a discount buyers apply by default when the two do not match. And where a meaningful share of the asking price sits in goodwill rather than hard assets, evaluating goodwill when buying a business is the lens a buyer’s advisor will apply to it — which matters for a reason that reaches all the way into financing, covered next.

The size of the realistic buyer pool

A multiple is also a function of demand: how many buyers exist who are both genuinely capable of running this specific business and able to finance the purchase at the price being asked. That pool is about to come under real pressure from the supply side — according to the Canadian Federation of Independent Business’s Succession Tsunami research, published January 2023, 76% of Canadian small business owners plan to exit their business within ten years. A growing wave of businesses coming to market without a matching growth in the number of buyers puts more weight, not less, on everything that makes a specific business stand out from the others competing for the same limited buyer attention.

Financing is where the buyer pool narrows most concretely. Under the Canada Small Business Financing Program guidelines, a term loan tops out at $1,000,000, with only $500,000 of that available for anything other than real property — and within that $500,000, only $150,000 can go toward intangible assets and working capital combined. Goodwill has only been an eligible intangible asset under the programme since July 2022, and it still shares that same $150,000 sub-limit with franchise fees, permits and working capital. A purchase price weighted heavily toward goodwill relative to hard assets — common in a service business with few physical assets — can genuinely outrun what a typical individual buyer can finance through the programme most small-business buyers actually use, which is exactly the kind of constraint what is a refinancing risk after an acquisition and larger facilities such as BDC’s Business Purchase or Transfer Loan exist to work around.

Two further things shrink or widen the realistic pool. First, how many comparable operators and potential strategic buyers actually exist in a given industry and region varies enormously — Statistics Canada’s Canadian Business Counts is the kind of dataset that shows just how thin that population can be outside a major city or a common sector. Second, a business is harder to sell to anyone when the sellers themselves cannot agree on price or process — how do I handle a sale when there are multiple owners is worth resolving before a listing goes up, because a buyer who senses the sellers are not aligned discounts for that execution risk on top of everything else. BDC’s own guidance on selling a business and Treadstone Law’s piece on how long it takes to sell a business in Ontario both make the same point from a different angle: a thin buyer pool does not usually kill a sale outright, it just makes it slower and more likely to close at a discount to the asking multiple.

Putting it together before you list

None of these eight factors moves in isolation, and a business rarely scores well or badly on all of them at once — which is exactly why a rule-of-thumb multiple, applied without looking at the specific business, tells a seller very little. Working through how to value a business in Canada to understand which method actually fits your business, and then getting a proper opinion — whether that is the lighter comparison in a multiple-based estimate vs a formal appraisal or a full engagement with a Chartered Business Valuator, the credential the CBV Institute sets and maintains — turns this list from a set of things to worry about into a specific set of things to fix before a business goes to market. Treadstone Law’s guidance on getting a business valuation before you list and the Canada Revenue Agency’s general guidance on selling a business are both useful starting points for that conversation.