How much should you pay for a business?
Your maximum price is the lowest of three numbers: what the earnings justify, what the loan can service, and what leaves you a return worth the risk.
Direct answer: Pay no more than the lowest of (1) verified SDE × a risk-adjusted market multiple, (2) the price at which debt service coverage stays at or above 1.25x after paying yourself a market salary, and (3) the price that still returns 20%+ cash-on-cash on your down payment.
Test 1 — The earnings test
Start with SDE you have reconciled to tax returns, then apply a multiple justified by size and risk. See typical SDE multiple ranges. If the seller's SDE relies on add-backs you cannot document, recalculate with those removed and use that number.
Test 2 — The debt service test
DSCR = (SDE − your salary) ÷ annual loan payments
Lenders generally require 1.25x or more. Below 1.15x, a single slow quarter puts you behind on the loan. This test, not the multiple, is what caps most real offers.
Test 3 — The return test
Cash-on-cash return = (SDE − your salary − annual debt service) ÷ cash invested
Include closing costs and working capital in cash invested, not just the down payment. An illiquid, concentrated, personally guaranteed small business should beat passive alternatives by a wide margin — 20%+ is a common floor for buyers.
Worked example
| Verified SDE | $300,000 |
| Asking price (3.5x) | $1,050,000 |
| Down payment (20%) | $210,000 |
| Loan: $840,000, 10.5%, 10 years | ≈ $135,000 / year |
| Your market salary | $80,000 |
| DSCR | ($300k − $80k) ÷ $135k = 1.63x |
| Cash-on-cash on $210k | ($300k − $80k − $135k) ÷ $210k = 40% |
This deal clears all three tests, so 3.5x is defensible here. Re-run it with revenue down 20% — if DSCR drops below 1.0x, negotiate price, more seller financing, or an earnout tied to performance.
Structure can be worth more than price
A seller note at 15–25% of price, an earnout on retained customers, a working-capital peg and a real non-compete often protect you more than shaving 0.2x off the multiple.
Find your maximum price for a specific deal
The AcquireAI acquisition calculator runs all three tests from the listing's numbers — implied multiple, amortized payment, DSCR, cash-on-cash return, payback period and a deal score.
Frequently asked questions
How many times profit should I pay for a business?
For owner-operated small businesses, 2x–4x seller's discretionary earnings is the normal range, with the exact number set by size, owner dependence, customer concentration and earnings trend.
How much cash do I need to buy a business?
Plan on 10–25% of the purchase price as a down payment, plus closing costs and several months of working capital. Seller financing can reduce the equity required but rarely eliminates it.
Should I pay the asking price?
Only if your own verified earnings figure supports it and the debt test passes. Asking prices commonly embed optimistic add-backs; final prices are frequently below asking.
What is a good payback period?
Most buyers want the purchase price recovered from earnings within three to five years. Beyond five, you are relying on growth or a future sale rather than the current business.