Net income multiple: which earnings, and whose net
- What assembling it costs in your own time
- $2,730
- Hours to assemble the whole pack
- 36
- Hours a week to be ready in time
- 5
Every figure here comes from the figures you enter and the method stated beside it: your document count, your own hourly worth, your expected price. This site publishes no valuation, no tax position and no legal opinion; what a clause means for your deal is your solicitor's and your accountant's.
Every multiple is a shorthand for the same sentence, which is that this business is worth some number of years of what it produces. The arguments are about which earnings figure goes underneath and what the number of years should be, and the first of those matters far more than the second. A multiple applied to net income means something quite different from the same multiple applied to earnings before interest, tax and owner adjustments, and a seller who has not said which one they mean is negotiating in the dark.
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Which line the multiple sits on, and why it changes everything
Net income is after interest, after tax and after whatever the owner chose to pay themselves, so it is the number most affected by decisions that have nothing to do with how the business trades. Two identical businesses, one with debt and one without, one paying the owner a salary and one taking dividends, show very different net income and identical operating performance. That is why buyers normalise first and why the same business carries very different multiples depending only on which line is quoted.
Revenue multiple, and the narrow case where it belongs
A revenue multiple ignores what it costs to produce the revenue, which is either a reasonable simplification or a serious error depending on the trade. It belongs where margins are genuinely standard across the sector, or where a business is deliberately spending its margin on growth and current earnings are not the point. Applied to an ordinary owner operated business with ordinary margins, it usually produces a number nobody will pay.
Revenue multiple valuation against an earnings multiple, side by side
The honest way to use either is to run both and explain the gap. If a revenue multiple gives a much larger answer than an earnings multiple, the business is either underperforming its sector on margin or the revenue multiple is drawn from companies that are not comparable. Either way the gap is the finding. A valuation that quotes only the flattering one is a negotiating document, not an analysis, and a buyer's adviser will produce the other within a day.
Capitalization rate business valuation, which is the same arithmetic inverted
A capitalisation rate is the reciprocal of a multiple: dividing earnings by a rate and multiplying earnings by a multiple are the same operation. What the rate form makes explicit is that the number is a required return, so it invites the right question, which is what return a buyer needs for the risk this particular business carries. Framed that way, customer concentration and owner dependence stop being adjectives and become the reason the rate moves.
Will it do what you need for Net income multiple?
Tell us where you are in selling your business and what you are trying to keep track of.
Net income multiple: common questions
What is a reasonable net income multiple for a small business?
There is no single answer and this page will not invent one. What can be said is that ranges are published by trade and that where a business sits inside its range is decided by the evidence a seller can produce, not by the trade it is in. Two businesses in the same sector on the same revenue routinely trade at very different multiples for reasons that are all visible in diligence.
How does company value based on revenue differ from value based on profit?
Revenue ignores the cost of producing it, so it rewards scale and penalises nothing. Profit rewards efficiency and is easier to manipulate through the owner's own choices. Buyers use both, and where they disagree materially the disagreement itself is the useful output rather than a problem to be resolved by picking one.
Is a revenue valuation ever the right method for an established business?
Rarely on its own, and usefully as a cross-check. An established business with real earnings is valued on those earnings. Where revenue multiples earn their place is as a sanity test: if the earnings-based answer implies a multiple of revenue far outside what the sector trades at, something in the normalisation is probably wrong.
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Keeping what you make
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