Mistake number one when buying a business is caring about how much you’re paying.

I know how ridiculous that sounds.

Of course price matters. You can overpay for a business. You can put too much debt on it. You can build a capital structure that leaves you with no margin for error. Valuation discipline matters.

But I’ve watched buyers become so focused on getting the best possible deal that they lose sight of what they’re actually trying to accomplish.

The goal isn’t to win the transaction. It’s to own the right asset.

 

The Difference Between 3.2x and 3.5x

There’s an old real estate adage that you make your money when you buy, not when you sell. In real estate, that logic makes intuitive sense. You’re buying a hard asset with relatively established comparable values, collecting rent, building equity and, ideally, benefiting from appreciation.

A business is a different asset.

The value lives largely in intangibles: the people, processes, systems, customer relationships, reputation, competitive position and future opportunities that produce the cash flow.

That distinction matters because buyers sometimes import the real estate mentality into business acquisitions. They become obsessed with finding the “deal.”

Someone will come to me with a good business trading around 3.5x earnings and tell me they really don’t want to pay more than 3.2x.

My question is: Are you willing to lose the business over that?

Take a company producing $500,000 in normalized annual earnings. At 3.2x, the purchase price is $1.6 million. At 3.5x, it’s $1.75 million. Even at 3.8x, it’s $1.9 million.

The entire spread from 3.2x to 3.8x is $300,000.

That matters. But so does what you’re buying.

 

 

If you own the company for ten years, $500,000 of annual earnings with no growth would represent $5 million in cumulative earnings before accounting for debt service, taxes, reinvestment or an eventual exit. At 5% annual growth, the cumulative earnings over that same period would be roughly $6.6 million.

Suddenly the question isn’t simply whether you can shave another 0.3x off the purchase price.

It’s whether you’re evaluating the right variable.

 

A Low Multiple Doesn’t Make a Business Cheap

There’s another problem with using the multiple as a scoreboard: not every dollar of earnings is equally valuable.

Imagine two businesses that each produce $500,000 in earnings.

One has recurring revenue, low customer concentration, a management team that can operate without the owner, consistent margins and a growing end market.

The other depends heavily on the seller, gets 40% of its revenue from one customer, has declining margins and needs significant capital investment over the next three years.

If the first trades at 3.8x and the second trades at 3.2x, which one is the better deal?

You can’t answer that from the multiple alone.

 

 

The current market reflects this. BizBuySell’s Q2 2026 Insight Report found that overall transaction volume declined 10% year over year, yet the average cash-flow multiple increased to 2.7x. The businesses that did sell were generally higher quality, while buyers placed greater emphasis on cash-flow stability, operational resilience and earnings durability. Demand remained particularly strong for businesses with characteristics like recurring revenue and experienced management.

In other words, buyers weren’t indiscriminately paying more. They were becoming more selective about what was worth paying for.

Price and quality aren’t independent variables. Quality is one of the things price is supposed to reflect.

 

Know Which Market You’re Buying In

This is also why you have to be careful with rules of thumb around acquisition multiples.

I often talk about businesses trading around three to four times annual earnings or cash flow, but there is no universal “small business multiple.”

The latest IBBA and M&A Source Q2 2026 Market Pulse shows how quickly valuation changes with deal size:

• Under $500,000 in enterprise value: 2.0x Seller’s Discretionary Earnings
• $500,000 to $1 million: 2.8x SDE
• $1 million to $2 million: 3.1x SDE
• $2 million to $5 million: 4.0x EBITDA
• $5 million to $50 million: 5.8x EBITDA

 

 

The report also found that strong businesses above $2 million continue to attract meaningful competition, even as buyers at the smaller end of the market have gained leverage and become more sensitive to financing, margins and operating risk.

That’s an important distinction. Buyers aren’t simply deciding what multiple they’re willing to pay in a vacuum. They’re competing—or choosing not to compete—for businesses with different economics, risk profiles and levels of demand.

The point isn’t to memorize those numbers. It’s to understand what they represent.

A multiple is a valuation tool. It isn’t an assessment of whether you should own the business.

 

What Sophisticated Buyers Are Actually Looking For

Traditional search funds offer an interesting comparison.

Their acquisitions tend to be larger than the Main Street transactions many first-time acquisition entrepreneurs pursue, so the multiples aren’t directly comparable. But their target criteria tell us something useful about how experienced acquisition investors think.

IESE’s international search fund research describes ideal search fund targets as businesses with high-quality, often recurring revenue, strong EBITDA and healthy industry growth.

The latest Stanford Search Fund Study continues to document a market in which investors are backing entrepreneurs to search for and acquire established companies rather than simply hunting for the lowest multiple available.

I’ve heard traditional search fund investors put the philosophy much more aggressively:

Find a great business and be prepared to pay for it.

I think that’s one extreme.

You still have to care about valuation. Financing still has to work. The business still has to generate enough cash flow to service the debt, fund operations and compensate you appropriately for the risk you’re taking.

But there’s a useful lesson in the search fund mentality: start with the quality of the asset.

Then determine what a fair price for that asset actually is.

Not the other way around.

 

Don’t Let Transaction Sophistication Become the Goal

I think this problem is becoming more relevant as acquisition entrepreneurship gets more sophisticated.

That sophistication is mostly a good thing. Buyers are better educated. There are more resources available. People understand concepts today that rarely came up in smaller business transactions twenty years ago.

But sophistication can become its own trap.

Buyers learn about seller financing, working-capital pegs, proprietary sourcing, complex deal structures and every other lever available in a transaction. Then they start believing that using those levers is what makes them a sophisticated buyer.

 

 

It isn’t.

I’ve never used seller financing on one of my own acquisitions. That’s not because seller financing is bad. There are deals where it makes perfect sense, and lenders may have their own reasons for wanting it.

I simply prefer a clean transition. I want to pay the seller, download as much knowledge as possible during the transition and let them move on while I take ownership.

The same principle applies to working capital negotiations, off-market sourcing and purchase-price negotiations. These are tools. Use them when they improve the transaction.

But don’t confuse complexity with intelligence.

• If squeezing another $100,000 out of the seller costs you the best business you’ve seen in eighteen months, did you negotiate well?
• If insisting on a sophisticated term borrowed from middle-market M&A makes a small-business seller distrust you and choose another qualified buyer, did the term create value?
• If you spend two years chasing the perfect off-market bargain while good businesses trade through brokers every day, are you actually optimizing your search?

 

Sometimes buyers optimize the variables that are easiest to measure because the thing that matters most is harder to put in a spreadsheet.

 

Evaluate the Asset Before You Optimize the Deal

Before I worry about whether I can move the seller another quarter-turn on the multiple, I want to know what I’m actually buying.

How durable are the earnings? How dependent is the business on the current owner? What happens if the largest customer leaves? Is there real demand for the product or service? Does the company have people and systems capable of supporting the transition? Where can the next owner create value? And, critically, am I the right person to do it?

Those questions aren’t substitutes for valuation.

They’re what make valuation meaningful.

A mediocre business doesn’t become great because you negotiated the seller down another 10%. And a great business doesn’t automatically become a bad acquisition because somebody else was willing to pay a slightly higher multiple.

The job is to understand the business well enough to know the difference.

Find a good business. Pay a fair price. Finance it appropriately. Make sure the transition works.

There are plenty of ways to get clever after that.

Just don’t get so focused on winning the deal that you lose the business.

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