Almost every business owner underestimates or overestimates what their business is worth, and usually by a wide margin. Some assume it is worth a multiple of revenue. Others have a number in their head based on what a competitor supposedly sold for. Both are usually wrong, because business valuation does not work the way most people assume. If you own a business in Texas and you are trying to understand what it is actually worth, this guide walks through how buyers really calculate it.
The short version: your business is worth a multiple of its earnings, but not the earnings on your tax return, and not your revenue. Understanding the difference is the whole game, and it is the difference between pricing your business correctly and either scaring off buyers or leaving hundreds of thousands of dollars on the table.
Revenue Is Not What Sells. Earnings Are.
The most common valuation mistake is anchoring to revenue. A business doing $2M in revenue is not automatically worth more than one doing $1M, because revenue says nothing about what is left after the bills are paid. A $2M business with thin margins and heavy overhead can easily be worth less than a lean $1M business that throws off far more cash.
Buyers do not buy revenue. They buy earnings, specifically the cash the business generates that they can rely on going forward. That is why the entire valuation conversation starts not with your top line but with a number called SDE.
SDE: The Number Your Valuation Is Built On
For most owner-operated Texas businesses, valuation is based on a multiple of Seller's Discretionary Earnings, or SDE. SDE is the total financial benefit the owner receives from the business in a year. It starts with the profit shown on your books, then adds back the things that are really benefits to you as the owner rather than true costs of running the business.
In practice, calculating SDE means starting with net profit and adding back:
- The owner's salary and any owner benefits
- Personal expenses run through the business
- One-time or non-recurring costs that will not repeat for a buyer
- Non-cash expenses like depreciation and amortization
- Interest, since a new owner's financing will look different
The result is a clean picture of what the business truly earns for its owner. This is the number buyers underwrite against, and getting it right, with every legitimate add-back documented, is the single most important part of preparing to sell. We cover exactly how it is calculated in our detailed guide on seller's discretionary earnings for Texas business owners. Larger businesses, generally those past roughly $1M to $2M in earnings with management in place, shift to a similar metric called EBITDA, but the principle is the same: value is a multiple of normalized earnings.
The Multiple: What Buyers Pay Per Dollar of Earnings
Once you know your SDE, valuation becomes an equation: SDE multiplied by a market multiple. For most owner-operated Texas businesses, that multiple falls between 2.5x and 5x, and where a specific business lands depends on how risky and how transferable its earnings are.
A simple example. A business with $300,000 in SDE, valued at a 4x multiple, is worth roughly $1.2 million. The same business at 3x is worth $900,000. That one turn of multiple is $300,000 of value, which is why the factors that push a business up or down the range matter enormously.
What moves you toward the higher end of the range:
- Recurring or contracted revenue rather than one-time sales
- The business runs without the owner in it day to day
- A diversified customer base with no single dominant account
- Clean, well-documented financials
- A stable, trained team and documented processes
What drags you toward the lower end: heavy owner dependency, customer concentration, messy books, declining revenue, or earnings that swing hard from year to year.
Typical SDE Multiples by Industry in Texas
Multiples vary by industry because some business models are inherently more durable and transferable than others. The ranges below reflect typical owner-operated valuations in the Texas market. They are starting points, not appraisals: a specific business can land above or below its industry range based on the factors above.
- HVAC: 3.0x to 5.0x SDE
- Pest control: 3.0x to 5.0x SDE, higher for strong recurring contract bases
- Plumbing: 2.5x to 4.5x SDE
- Electrical contracting: 2.5x to 4.5x SDE
- Roofing: 2.5x to 4.5x SDE
- Pool service: 2.5x to 4.5x SDE, driven heavily by route density
- Lawn care and landscaping: 2.5x to 4.0x SDE
- Distribution and vending routes: 2.0x to 4.0x SDE
- B2B and professional services: 2.5x to 4.0x SDE
- Manufacturing: 3.0x to 5.0x SDE at the smaller end, shifting to 4.0x to 7.0x EBITDA at scale
The pattern across all of these is the same: recurring revenue and low owner dependency push you up, concentration and volatility pull you down. An HVAC business built on maintenance contracts sits at the top of its range. One built on one-time installs sits near the bottom.
Why a Real Valuation Beats a Rule of Thumb
The ranges above are useful for orientation, but they are not a substitute for an actual valuation of your specific business. Two businesses in the same industry with the same revenue can be worth dramatically different amounts based on their earnings quality, customer mix, and how dependent they are on the owner. A rule of thumb cannot capture that. A proper valuation looks at your real SDE, your specific risk factors, and current buyer demand in your market.
Getting a real valuation early, ideally well before you plan to sell, is one of the smartest moves an owner can make. It tells you what your business is worth today, where the gaps are, and what to fix in the year or two before going to market to move up the multiple range. For more on the process and timeline once you decide to move forward, see our guides on preparing your business for sale and how long it takes to sell a business in Texas.
Find Out What Your Texas Business Is Worth
A Texas business broker can give you a real, market-based valuation grounded in what buyers are actually paying right now, not a generic multiple. Anchorpoint Associates offers a free, confidential business valuation for Texas owners, whether you are ready to sell now or just want to understand where you stand.
No obligation and no pressure. Just a clear, honest picture of what your business is worth and what would move that number. Request your free valuation here.