Two people can look at the same business, both say "it's worth about 4×", and be $300,000 apart. Not because either is wrong, but because they are multiplying different things.
The three multiples
Multiple of… | Typical user | Where it applies |
|---|---|---|
ARR (annual revenue) | VC-backed / growth-stage | Above ~$1M ARR, growth over profit |
SDE (owner earnings) | Small-business buyers | Under ~$1M price, owner-operated |
EBITDA | PE / institutional | Above ~$1M profit, management in place |
For almost every business that changes hands on a marketplace like this one, SDE is the correct basis. If someone quotes you an ARR multiple for a $150k business, they have imported a framework from a market you are not in.
Why the ARR multiple misleads small sellers
Founders read that SaaS companies trade at 6× ARR and apply it to a $90,000/year product. But those headline figures come from venture-scale companies with 100%+ net revenue retention, sub-1% monthly churn and a market that will still be there in a decade. A one-person tool with 4% churn is a different asset class wearing similar clothes.
Converting between them
If a seller quotes ARR and you want SDE, you need the margin. A tool doing $120,000 ARR at a 70% owner margin is $84,000 SDE. A 3.5× SDE multiple prices it at $294,000 — which is 2.45× ARR. Same business, same price, two numbers that sound wildly different.
Trailing, not forward
The other silent disagreement is the period. A seller quoting "$8k MRR" after their best-ever month is describing an annualised run rate. A buyer paying on the trailing twelve months is describing history. On a business that grew through the year, those two can differ by 30%.
Neither is dishonest, and there is a fair compromise: price on trailing twelve months, and let the seller argue for a premium — or an earnout — on the recent trend. What you cannot do is annualise one great month and call it the baseline.
What to ask for
Twelve months of revenue, month by month — from the payment processor, not a spreadsheet.
Every recurring cost, itemised — hosting, tools, contractors, ad spend.
The add-back list, with a reason for each line.
Churn by month, so you can see whether retention is drifting.
With those four things you can compute all three multiples yourself, and the conversation stops being about vocabulary and starts being about risk.