Book Value vs. Sale Price: Why Multiples and Rules of Thumb Can Mislead You

When it comes to business valuation, one of the most common misconceptions—especially among first-time buyers or sellers—is that a business’s book value or a standard industry multiple determines its sale price.

In reality, the price paid in a transaction is shaped by much more than balance sheets or back-of-the-napkin math. If you're not careful, relying too heavily on rules of thumb or notional assumptions can lead to mispricing, missed opportunities, or undervaluing what you've built.

This article explores:

• The difference between notional value, book value, and market price

• Why EBITDA/SDE multiples and rules of thumb are helpful—but risky when taken at face value

• How deal terms and hidden context influence what a business really sells for

Notional Value (and Book Value): A Starting Point—Not the Final Price In professional valuation standards, notional value refers to the estimated value of a business in a hypothetical transaction between informed, arm’s-length parties—before the business is exposed to the open market. It’s commonly used by CBVs (Chartered Business Valuators) for internal planning, legal proceedings, tax assessments, and estate purposes.

Book value, on the other hand, is the accounting value found on the balance sheet: Assets – Liabilities = Book Value

While useful in some contexts, neither notional value nor book value reflects the business’s true market value—what a real buyer is willing to pay. Buyers don’t purchase spreadsheets; they buy future earnings, operational stability, and opportunity.

A business with strong recurring revenue and low owner involvement may command a premium well above book value. On the flip side, a company with high assets but weak earnings or outdated systems may attract less buyer interest than expected.

EBITDA/SDE Multiples and Rules of Thumb: Useful, But Not Absolute You’ve probably heard rules like:

• “Plumbing companies trade at 2.5x EBITDA/SDE.”

• “Marketing firms go for 1x revenue.”

• “Retail businesses are valued at 30% of annual sales.”
  

These industry multiples and valuation shortcuts are everywhere. And while they can serve as a useful gut check, relying on them alone is risky.

Why? Because these multiples are averages, often derived from incomplete or outdated deal data. What’s missing is context—and that’s where real-world value lives.

Here’s what most multiples don’t tell you:

• Owner motivation – Was the seller forced to exit due to illness, burnout, or financial distress?

• Timing of the deal – Was it during a buyer’s market, or in a high-interest-rate environment?

• Business performance trends – Was revenue stable or had the business recently declined or surged?

• Quality of records – Were financials clean, or did due diligence uncover red flags?

• Negotiation strength – Did either party have experienced advisors or leverage?

• Deal structure – Was the sale all-cash, or was it loaded with contingencies, seller financing, or earnouts?
  

Two businesses with identical EBITDA/SDE can sell for very different prices depending on these variables.

Buyers Don’t Just Buy Financials—They Buy Risk and Potential Serious buyers assess more than just profitability. They evaluate:

• How reliant the business is on the owner

• Scalability and growth potential

• Customer concentration or revenue diversification

• Systems, team, and operational efficiency

• Transferability – Can the business run without the seller?
  

For example, a business earning $500,000 in SDE might be worth far more if it runs on autopilot with minimal owner involvement, compared to another with the same earnings but a single key client and no systems in place.

Perceived risk and opportunity directly influence how a buyer values your business—and what they’re willing to pay.

Deal Terms Can Dramatically Impact Price

A crucial (and often overlooked) factor in small business valuation is the structure of the deal itself.

Here’s how deal terms influence the final price:

• A 4x EBITDA/SDE offer with 60% cash at close and 40% earnout may be worth less than a 3.5x offer that’s all cash.

• Working capital adjustments may lower proceeds if the business doesn’t include enough receivables or inventory.

• Whether the transaction is an asset sale or a share sale can also affect taxes and net proceeds for both sides.
  

The headline number might sound attractive, but the actual payout can vary significantly based on how the deal is negotiated and structured.

Mispricing Your Business: The Risks

Misunderstanding valuation fundamentals can lead to major consequences:

For Sellers:

• Overpricing turns away serious buyers and wastes time

• Underpricing means leaving significant value on the table

• Relying solely on rules of thumb may overlook hidden strengths or risks

For Buyers:

• Overpaying can reduce ROI and strain financing

• Misjudging value can make resale or future growth difficult

• Lack of context in deal comps can lead to unrealistic expectations
  

In either case, using overly simplistic valuation methods without full analysis can derail a deal before it even starts.

Conclusion: Price Is More Than a Formula

Whether you're buying a business or preparing to sell, remember this:

Valuation is not a fixed formula—it’s a reflection of performance, risk, and structure, shaped by negotiation and market timing.

While book value and notional value offer useful benchmarks, and EBITDA/SDE multiples can serve as a starting point, real-world pricing depends on the specific strengths of the business, the context of the sale, and the terms of the deal.

If you want to get it right, don’t rely on guesswork. Work with a trusted advisor or business broker who can help you understand not just what your business is worth—but why. Disclaimer: This blog post is for informational purposes only and does not constitute professional financial or tax advice. Always consult with a qualified accountant or tax advisor regarding your specific circumstances before making financial decisions.