The Handshake Royalty: How Much Is My Small Business Worth in 2026?

Law Smith

Founder & President, Tocobaga

Law Smith is the Founder and President of Tocobaga, a Tampa-based ROI-focused marketing agency and SMB advisory. He has served as a fractional CMO for PE-backed portfolio companies across home services, professional services, and B2B industries, helping operators scale lead generation and reduce customer acquisition costs at the platform level. With 30+ business plans written and 600+ integrated marketing campaigns executed, Tocobaga brings the reporting discipline and growth infrastructure PE firms expect from their portfolio operators. Tocobaga is a Google Partner and Squarespace Gold Partner headquartered in Ybor City.

In the early 1950s, Ray Kroc was a traveling salesman in a slump, peddling the Multimixer, a five-spindle milkshake machine. Then a small restaurant in San Bernardino, California, ordered eight of them.* Nobody orders eight milkshake machines. Kroc drove out to see why and found two brothers, Richard and Maurice McDonald, Dick and Mac, running a hamburger stand with the efficiency of a pit crew.

Kroc talked his way into the exclusive right to franchise their method. The terms were specific: Kroc collected 1.9 percent of each franchisee's gross sales and passed half a percent of it to the brothers.*,† He opened a showcase store in Des Plaines, Illinois, in April 1955 and sold 18 franchises his first year.* By 1961, that half a percent was paying the brothers roughly $200,000 a year for staying home.‡

Then Kroc wanted them gone. Dick McDonald named a price of $2.7 million: a million dollars for each brother and $700,000 for the taxes.†,‡ Kroc did not have $2.7 million. His finance man, Harry Sonneborn, found it among a group of investors that company lore calls the 12 apostles.† By one trade publication's math, the price came to about 13.5 times the royalty stream it replaced.‡ That is a valuation multiple. It was written down, signed and paid in cash.*

The rest was not written down. The McDonald family's account, as Dick's grandson Jason McDonald French has told it, is that Kroc also agreed on a handshake to keep paying an annual royalty of half a percent, and that the money never came. "It's probably billions of dollars," French said.§ Others dispute the whole thing. Kroc's autobiography never mentions such a promise, an early employee said he never heard of one, and the brothers never claimed it in public.‡ Author Lisa Napoli argues Kroc never cheated them out of the half percent at all.† Sixty-five years later, nobody can prove it either way.

One more piece of business stayed unwritten. The brothers believed they had kept the original San Bernardino restaurant; Kroc believed he had bought it. They kept the building but not the name, so it became The Big M. Kroc, who told a longtime employee he was "not normally a vindictive man" before promising in saltier language to get even, opened a new McDonald's one block away. The Big M did not survive it.*

Here is what survived: $2.7 million. The number on the contract was the valuation. Everything on a handshake became a story. Every small business sale in 2026 runs on the same split: the add-backs on a seller's spreadsheet, the earnout, the promise that the big customer will stay, the verbal deal to keep the founder on as a consultant. Handshakes, every one, until somebody writes them down and a buyer's accountant agrees they are real.

Tocobaga, the Ybor City, Tampa marketing agency and SMB advisory behind SolvingHow.com, sees that split from an unusual seat. Law Smith and the Tocobaga team have advised more than 1,000 small and mid-sized businesses, and plenty of those conversations now start with an exit date instead of a growth target. The question owners post in forums is blunt: for people who recently bought or sold a small service business, which multiple or valuation method actually held up, and what surprised them? The honest answer is uncomfortable. The multiple that holds up is the one applied to earnings that survive diligence. The surprises are almost always the handshakes.

How much is my small business worth in 2026?

Most small service businesses in 2026 sell for about 2.3 to 3.7 times their annual cash flow, with the low end for deals under $1 million and the high end for deals above it. The median small business sold in the third quarter of 2026 went for $350,000, up 17 percent from a year earlier, across 2,132 reported transactions.‖,¶

That median hides two different markets. Below $1 million, the median business threw off $123,000 in cash flow and sold for $250,000, at an average of 2.30 times cash flow. Above $1 million, the median business produced $559,000 and sold for $1.8 million, at an average of 3.73 times. The bigger deals hit a record 22 percent of all transactions.‖ Market-wide, the average multiple was 2.7 times cash flow and 0.7 times revenue in the second quarter, and cash flow multiples rose another 2.6 percent in the third.**,¶

Turn those decimals into money. An owner clearing $150,000 a year who sells at 2.3 times walks away with $345,000. The same owner at 2.7 times gets $405,000. That $60,000 gap is a new service van, and it gets decided by things that never appear on a profit and loss statement: who answers the phone, who owns the customer relationships, and whether the books can survive a stranger with a calculator.

There are three classic ways to value a business. The market approach applies multiples from comparable sales. The income approach discounts expected future cash flow back to today. The asset approach adds up what the equipment, receivables and inventory would fetch. For owner-operated service businesses, the market approach wins almost every argument, because that is how buyers bid and how lenders underwrite. An SBA lender does not care about a seller's ten-year projection. Under the SBA rules that took effect October 1, 2026, debt coverage must be shown on historical earnings, and projections cannot be used.††

Mood matters too. BizBuySell's buyer confidence index sat at 49 and seller confidence at 47 in the third quarter, and 27 percent of owners planning to sell said current conditions had them thinking about selling sooner.¶ BizBuySell President Bob House put the whole market in one sentence: "Buyers are gravitating toward businesses with reliable cash flow, clean financials, limited owner dependence, and a clear path to financing."¶ Every item on that list is something written down. None of it is a handshake.

What small businesses actually sold for in 2026, by size and sector, and the earnings measure buyers used to price them.

Segment	Earnings basis	Typical multiple or price	Source
Businesses selling under $1 million	Cash flow (SDE)	2.30x average; median price $250,000 on $123,000 cash flow	(BizBuySell, Q3 2026)
Businesses selling over $1 million	Cash flow (SDE)	3.73x average; median price $1.8 million on $559,000 cash flow	(BizBuySell, Q3 2026)
All small businesses, market-wide	Cash flow and revenue	2.7x cash flow; 0.7x revenue	(BizBuySell via Small Business Trends, Q2 2026)
Service businesses	Cash flow	Median price $350,000 on $157,378 median cash flow	(BizBuySell, Q3 2026)
Manufacturing	Cash flow	3.02x average, highest major sector; median price $807,000	(BizBuySell, Q3 2026)
Restaurants	Cash flow	2.39x average; median price $235,000	(BizBuySell, Q3 2026)
Deals of $2 million and under vs. $2 million to $50 million	SDE below $2 million; EBITDA above	Basis shifts as the buyer pool shifts	(IBBA Market Pulse, Q2 2026)
Service-heavy HVAC with recurring revenue	EBITDA	10x to 12x or more	(PitchBook, 2025)

What is SDE, and how is it different from EBITDA?

Seller's discretionary earnings, or SDE, is the total cash benefit one full-time owner-operator takes out of a business in a year: pre-tax profit plus the owner's salary, benefits, interest, depreciation and any genuinely one-time or personal expenses. EBITDA is earnings before interest, taxes, depreciation and amortization after paying a market-rate manager, which makes it the yardstick for businesses big enough to run without the owner.

The line between the two is mostly a line about size. In the business brokers' Market Pulse survey, deals of $2 million and under are priced as a multiple of SDE, while deals from $2 million to $50 million are priced on EBITDA.‡‡ The switch happens because the buyer changes. A first-time buyer with an SBA loan is buying a job plus a return. A private equity platform is buying a return and hiring someone else to do the job.

The gap in dollars is large enough to start fights at family Thanksgiving. Take a business with $420,000 of SDE. If a buyer has to pay a general manager $140,000 to replace the owner, EBITDA is $280,000. At 3 times SDE, the business is worth $1.26 million, which is also 4.5 times EBITDA. A seller who reads about 5 times EBITDA multiples in a trade journal and applies that number to SDE has quietly inflated the asking price by $840,000. That is not a negotiating position. That is a category error with a signature line.

Then come the add-backs, and the add-backs are where the handshakes live. Every add-back is a claim that an expense will not follow the business to its next owner: the owner's truck, the spouse on payroll, the "one-time" legal bill that shows up every spring. Some claims are true. Some are the McDonald brothers' half percent, sincerely believed and impossible to document. A buyer, and a buyer's lender, will count only the ones that come with paper.

The practical rule is simple. Every add-back needs three things: a document that proves the expense happened, a reason it will not recur, and a dollar amount that ties to the general ledger. An add-back with all three is a contract term. An add-back with one of the three is a story the owner tells at closing, and buyers have heard that story before.

What is the SDE multiple by industry and deal size?

The SDE multiple by industry clusters between roughly 2 and 3 times cash flow for most small businesses, and deal size moves it more than industry does. BizBuySell's third-quarter 2026 data put manufacturing at an average of 3.02 times cash flow, the highest of the major sectors, and restaurants at 2.39 times.‖

Service businesses, BizBuySell's largest category, made up 992 of the quarter's deals, or 47 percent of the market, up 9 percent from a year earlier. Their median sale price was $350,000 against median cash flow of $157,378.‖ Medians do not divide neatly into an average multiple, but the ratio of the two, about 2.2, lands right where most practitioners would guess. Manufacturing's median price jumped 58 percent year over year to $807,000, and retail's median reached $272,500.‖

The size premium is the bigger story. A business with $559,000 of cash flow sells at 3.73 times; one with $123,000 sells at 2.30 times.‖ The reason is risk and the price of capital. The 2026 Pepperdine Private Capital Markets Report found private equity investors in companies with $1 million to $5 million of EBITDA expect a median return of about 20 percent, rising to 25 percent in the midmarket, and business appraisers apply a median 15 percent discount for lack of marketability to private companies.§§ Smaller, owner-run businesses carry more risk per dollar of earnings. Buyers demand a higher return for that risk, and a higher required return is just a lower multiple wearing a different hat.

Here is the arithmetic a buyer runs in the back of the head. Pay 2.5 times for $200,000 of SDE, and the buyer spends $500,000 to earn $200,000 a year before paying anyone to do the work. Subtract a $90,000 salary for the buyer's own labor, and the business earns $110,000 on $500,000, a 22 percent return. That lines up with what the professional money expects. Pay 4 times for the same business, and the return drops to about 14 percent. Pay 6 times, and it is about 9 percent, which is a bond fund with a mop bucket.

At the top of the ladder sits the number that drives the whole roll-up economy. PitchBook found service-heavy HVAC businesses with recurring revenue, strong retention and regional density often trade at 10 to 12 times EBITDA or more.‖‖ The distance between a $400,000-cash-flow shop at 3 times SDE and a platform at 11 times EBITDA is not a typo. It is the business model of every private equity firm buying local service companies. For a seller, the lesson is that the multiple is not a fixed property of the industry. It is a price on how much of the business can survive without its owner.

Why do some small businesses sell for higher multiples than others?

Buyers pay higher multiples for earnings that are predictable, transferable and provable: recurring revenue, a business that runs without its owner, no single customer who can sink it, clean books and a marketing engine that produces leads on its own. Each of those traits lowers the odds that the earnings disappear after closing, and lower risk buys a higher multiple.

Kroc's deal is the cleanest illustration in American business. He paid roughly 13.5 times the brothers' annual royalty.‡ That is a monster multiple, about five times the 2.7 average a typical small business fetched this year. Look at what he was buying. The royalty was contractual, written into the franchise agreements. It was recurring, paid on every franchisee's sales. It required nothing from the brothers, who were half a continent away from the Illinois stores. It grew with every new location. And it was documented to the penny. Every trait that makes a buyer pay up in 2026 was baked into that written half percent.

Now map those traits onto a modern service business:

• Recurring revenue. An HVAC company with 1,100 maintenance-agreement members at $199 a year has $218,900 that renews before anyone picks up the phone, plus a calendar of service visits that feeds replacement sales.

• Owner independence. A general manager who runs dispatch, pricing and hiring means the earnings walk in the door without the founder.

• Customer diversification. No single account large enough that losing it would break the debt payments.

• Clean books. Accrual-basis financials, reviewed by a CPA, that tie to bank statements and tax returns without a two-hour explanation.

• A transferable marketing engine. Owned accounts, documented lead flow and reviews in the company's name, so new customers keep arriving after the sign changes.

Brokers quoted in BizBuySell's third-quarter report said it plainly. Fred Petito: "Buyers are more cautious with businesses exposed to thin margins, high fixed costs, or a heavy reliance on the owner." Vipin Singh said buyers are "heavily discounting lower-tier or high-risk listings." And a Michigan broker named, of all things, Jake McDonald: "Well run, high performing businesses remain a scarce commodity, creating a seller friendly environment."‖ Scarcity cuts both ways. The good businesses get bid up. The rest get discounted, and the discount lands on the multiple, not the revenue.

That last point deserves a beat. Revenue is a fact. The multiple is an opinion about the future. Owners spend years growing revenue and almost no time managing the opinion, which is why two HVAC companies with identical revenue can sell a full turn apart. On $300,000 of SDE, the spread between BizBuySell's small-deal average of 2.30 and its large-deal average of 3.73 is $429,000. That is the price of the opinion.

How much do owner dependence and customer concentration lower a business's value?

Owner dependence and customer concentration are the two fastest ways to drag a business from the top of its multiple range to the bottom, because both put the earnings at risk the day the keys change hands. Buyers handle that risk three ways: a lower multiple, a longer seller transition, or a chunk of the price moved into an earnout.

The simplest owner dependence test costs nothing. The owner takes two weeks off with the phone in a drawer. If revenue, quotes, hiring and collections keep moving, the business is an asset. If the phones ring through to a voicemail box that only the owner checks, the business is a job with a lease. A two-partner estate planning firm in Clearwater where every client has the founding partner's cell number is selling a Rolodex that can walk out the door. A management consultancy where the founder is the brand is selling a person, and people cannot be bought. They can only be rented with an employment agreement.

The IBBA's 2026 chairman, James Parker, described the bottom of the market in exactly those terms: above $2 million, strong businesses still draw real competition, while at the smallest end buyers hold more bargaining power and are more sensitive to financing and operating risk. "The market is not moving in one direction," he said.‡‡ Owner dependence is operating risk with a name tag.

The SBA has quietly written the fix into its rules. Under SOP 50 10 8.1, effective October 1, 2026, a selling owner can stay on as a consultant for up to 24 months, up from 12.†† That transition period is the written version of "the customers will stay." A seller who wants full price should offer it before the buyer asks, with a schedule of which relationships move to which employee in which month.

Customer concentration does its damage through fixed costs. Picture a Tampa 3PL with $5 million in revenue and $600,000 in SDE, where one shipper accounts for 40 percent of volume. If that shipper leaves, $2 million of revenue goes with it, but the warehouse lease, the forklifts and the night shift stay. If that account carries a 25 percent contribution margin, the business loses $500,000 of earnings and SDE falls to $100,000. A buyer who prices that scenario even partially will cut the multiple, demand a long-term contract with the shipper, or move part of the price into an earnout tied to that account. The seller's handshake with a longtime customer is worth exactly what the customer is willing to sign.

What is a quality of earnings report, and what does it usually find?

A quality of earnings report, or QoE, is an independent accounting review that tests whether a business's reported earnings are real, recurring and backed by cash in the bank. It usually finds that some add-backs are not one-time after all, that some personal expenses lack documentation, and that adjusted earnings land below the seller's number.

The work has three core pieces: testing each add-back against records, a proof of cash that ties reported revenue to actual bank deposits, and an analysis of working capital. For businesses with an enterprise value under $5 million, a limited-scope buy-side QoE typically costs $20,000 to $35,000 and takes four to six weeks; sell-side reviews run 10 to 30 percent higher. The items that eat the most testing time are owner compensation adjustments, related-party rent and recurring "one-time" costs.¶¶

In 2026 the review became mandatory for bigger SBA deals. Since October 1, any SBA-financed acquisition priced at $3 million or more needs a QoE, and it must include a proof of cash covering the trailing 12 months and the last two fiscal years.***,†† The lender must use the QoE's earnings, not the seller's, when it tests whether the business can carry the debt.*** Put plainly, for deals above $3 million the federal government now requires that someone read the contract instead of trusting the handshake.

Below $3 million, nothing in the SBA rules forces a QoE, but serious buyers commission one anyway, and sellers who commission their own first get to fix problems before those problems become price cuts. A $30,000 sell-side review that catches $50,000 of add-backs that will not survive, a year early, gives the owner time to replace the story with twelve months of clean numbers. At 3 times, $50,000 of real, recurring earnings is $150,000 of price. That is a five-to-one return on an accounting bill, which is better than most owners get on their ad spend.

If the McDonald brothers had commissioned a QoE on the handshake royalty, the report would have had one finding: no document, no deposit, no value. The written royalty would have sailed through. It had contracts, a payment history and a counterparty. The difference between the two was never the brothers' sincerity. It was the paperwork.

What happens to the price when add-backs fail quality of earnings?

When add-backs fail quality of earnings, the price usually drops by the rejected amount times the multiple, and the financing can break even when the seller holds firm on price. A hypothetical HVAC company shows how fast the math compounds.

Picture a residential HVAC company in Pasco County, north of Tampa, with $2.2 million in revenue. Its tax return shows $78,000 of pre-tax profit. The owner's broker builds SDE of $420,000 by adding back $342,000 and lists the business at 3 times, or $1,260,000. Here are the add-backs:

• Owner's salary and payroll taxes: $150,000

• Owner's health insurance and retirement contribution: $24,000

• Depreciation and interest: $46,000

• Spouse on payroll: $52,000

• "One-time" warranty callbacks and a compressor problem: $30,000

• "Non-recurring" marketing, a website rebuild plus an agency retainer: $25,000

• Owner's personal vehicle, phones and travel: $15,000

The buyer, an acquisition entrepreneur using an SBA loan, pays about $25,000 for a limited-scope QoE. It comes back four weeks later with four findings. The spouse works 30 hours a week running dispatch and booking, and replacing her costs $41,000, so only $11,000 of her pay survives as an add-back. The warranty callbacks happened in each of the last three years, so the $30,000 is a cost of doing business, not an event. The website rebuild was $7,000 and truly one-time, but the $18,000 agency retainer runs every month and will keep running under the next owner. And $9,000 of the personal expenses has no receipts.

The rejections add up to $98,000: $41,000 plus $30,000 plus $18,000 plus $9,000. Adjusted SDE falls from $420,000 to $322,000. At the same 3 times multiple, the price falls from $1,260,000 to $966,000. That is $294,000 gone, or $3 of price for every $1 of add-back that could not produce a document.

Then the multiple moves. The QoE also notes that one homebuilder accounts for 22 percent of revenue through new-construction installs, and the owner holds that relationship personally. The buyer drops the multiple to 2.7 times. New price: $869,400. From listing to offer, the business lost $390,600, or 31 percent, and not one truck, customer or technician changed.

Now the part that surprises sellers most: the financing. Assume a 10-year SBA loan for 90 percent of the price at 10 percent interest, which is prime's 7 percent after September's Fed hike plus a spread.††† At the original $1,260,000 price, the loan is $1,134,000 and debt service runs about $179,800 a year. On the seller's numbers, SDE of $420,000 minus a $110,000 salary for the new owner leaves $310,000, comfortable coverage of 1.72 times. On the QoE's numbers, $322,000 minus $110,000 leaves $212,000, coverage of 1.18 times. The SBA requires 1.25 for an acquisition, measured on historical earnings.†† At the asking price, the deal cannot be financed. At $869,400, the loan is $782,460, debt service is about $124,100 a year, and coverage is a healthy 1.71.

The equity side tightens too. The buyer must inject 10 percent, or $86,940. Under SBA rules, a seller note can supply at most half of that, $43,470, and only if it sits on full standby with no payments for the life of the loan.‡‡‡ Every add-back on that list was a handshake. The ones with paper made it to the closing table. The ones without became the gap between $1.26 million and $869,400.

What are the SBA seller note rules for buying a business in 2026?

Under SBA rules in force since June 1, 2025, a buyer financing an acquisition with a 7(a) loan must inject at least 10 percent equity, and a seller note counts toward that injection only if it sits on full standby, with no principal or interest payments, for the entire term of the loan, and only for up to half of the injection. A seller who keeps any equity is treated as an owner and must personally guarantee the loan for two years, and the business must be 100 percent owned by U.S. citizens, lawful permanent residents or U.S. nationals.‡‡‡

SOP 50 10 8.1, effective October 1, 2026, rearranged the rules without loosening them. For an initial acquisition, the 10 percent injection cannot be reduced or eliminated. Seller debt, standby debt and minority equity together still cannot exceed half of the injection. Debt coverage of 1.25 to 1 must be shown on historical earnings, never projections. The maximum seller consulting period stretched from 12 to 24 months. And 7(a) small loans can no longer be used for any change of ownership.†† Rates moved as well: JPMorgan, KeyCorp and BNY raised their prime rate to 7 percent from 6.75 percent after the Fed's September 16 hike, its first since 2023, and SBA 7(a) rates are commonly pegged to prime.†††

Can someone buy a small business with no money down in 2026? Not with an SBA loan. At least half of the 10 percent injection has to come from sources like the buyer's own cash, which on the HVAC example is at least $43,470 of real money.††,‡‡‡ Deals pitched online as "zero down" usually mean the seller is financing most of the price outside the SBA, which turns the seller into the bank. The seller carries the risk and waits to be paid by someone who already has the keys. That is the McDonald brothers' seat, and it was not a comfortable one.

For a seller, a full standby note deserves its own math. A $43,470 note that pays nothing for 10 years and then returns only its principal is worth about $16,760 today at a 10 percent discount rate, before anyone prices the risk that the business stumbles in year four. A seller should count it at something closer to that number than to face value. It is paper, but it is paper that behaves like a handshake for a decade.

The guarantee rule catches sellers too. A seller who keeps a 10 percent stake to share in the upside is, under the 2025 rules, also co-signing the buyer's debt for two years.‡‡‡ That is a fine trade for some sellers and a nasty surprise for others. The time to learn it is before the letter of intent, not at the closing table.

What is the strongest case for accepting an earnout when selling a business?

The strongest case for an earnout is that it gets a deal done when buyer and seller disagree about the future, and it lets a seller get paid for growth a buyer refuses to pay for up front. A seller who believes the business will grow, and who stays to run it, can in theory collect more through an earnout than any buyer would ever offer in cash.

Earnouts are getting more common, which suggests they solve a real problem. SRS Acquiom found 24 percent of private-target deals in 2025 included an earnout or milestone payment, up from 17 percent across 2014 to 2022. In the lower middle market, deals of $50 million or less, the rate was 30 percent, and private equity buyers used them in 24 percent of deals, up from 13 percent.§§§ And 59 percent of non-life-sciences earnouts pay at least something.§§§

The steelman goes further. The McDonald brothers' original royalty, the one written into Kroc's franchise arrangement, worked. It paid them roughly $200,000 a year until Kroc bought it out at 13.5 times.‡ A royalty is an earnout with no end date. When it was on paper, it paid every year. Written well, an earnout is just a contract with a variable price, and a seller who controls the operations during the earnout window has real influence over the outcome.

Now the data that should cool the enthusiasm. Across SRS Acquiom's non-life-sciences deals, sellers have collected about 21 percent of the maximum potential earnout dollars, roughly one dollar in five. Even when an earnout pays at least partially, the average is about 50 cents on the dollar, and in the lower middle market the median is 43 cents.§§§ Apply that to the HVAC deal. A $250,000 earnout tied to two years of revenue is worth something like $52,500 on the base rate, or about $107,500 if it pays at all. A seller who counts it at $250,000 is counting the handshake.

What separates the contract from the handshake is drafting. A seller who accepts an earnout should push for a revenue metric instead of EBITDA, because the buyer controls the expense allocations that move EBITDA. The window should be short, 12 to 24 months, with monthly reporting and audit rights. The agreement should accelerate payment if the buyer sells or merges the business, and it should spell out what the buyer may not do, such as folding the brand into another location or shifting the best technicians to a sister company. The brothers' written royalty had a formula and a counterparty. The handshake royalty had a memory. Earnouts that pay look like the first one.

Who is buying small service businesses in 2026?

Four groups buy most small service businesses in 2026: private equity platforms and their add-ons, individual acquisition entrepreneurs using SBA loans, investor-backed search funds, and local competitors. All of them are fishing in a pond that keeps filling, because a huge generation of owners is aging out.

The supply side is enormous. Gallup found 52.3 percent of U.S. employer businesses, about 3 million of nearly 6 million, are owned by people 55 or older. Among owners 55 and up, 17 percent planned to sell or transfer the business within five years, and 13 percent planned to close it.‖‖‖ If that 13 percent held across those 3 million firms, it would mean roughly 390,000 employers switching off the lights rather than finding a buyer. Some of those businesses truly cannot be sold. Many are just unprepared, which is a fixable condition with a 12 to 24 month cure.

Private equity is the loudest buyer. PitchBook counted 55 private equity HVAC deals in North America and Europe in 2024, up 72 percent from 32 in 2023 and the most since at least 2017, including the roughly $1.5 billion buyout of Sila Services.‖‖ A PE-backed HVAC platform in its second add-on will often pay the best price in town for a business that plugs in cleanly, because every dollar of EBITDA it buys at a small-business multiple gets revalued inside a platform that can trade at 10 to 12 times or more.‖‖ Same Name on the Truck, Tocobaga's earlier field guide to private equity buying small businesses, covers what happens to the brand, the staff and the customers after that phone call.

Search funds are the buyer most owners have never heard of. Stanford's 2026 Search Fund Study tracked more than 850 traditional search funds since 1996. Fifty-eight percent acquired a company, typically about 20 months into the search, and the asset class has returned an aggregate 33.9 percent IRR and 4.75 times invested capital through 2025.¶¶¶ The median purchase price for 2024 to 2025 acquisitions was $16 million.¶¶¶ That last number matters to a Main Street seller. Traditional search funds hunt bigger game than a $1 million shop. The buyer calling about a $2 million HVAC company is more likely a self-funded searcher: a corporate refugee with an MBA, an SBA prequalification and a spreadsheet full of add-back haircuts.

Then there are the quiet buyers. A competitor across town can pay for route density, trained technicians and a customer list, and sometimes pays the most because it can cut overlapping costs. Employees can buy too, through an ESOP or a cooperative, which the SBA treats as its own category with no equity injection required for an ESOP loan that buys 51 percent or more of the company.†† Each buyer type reads the same financials differently, but every one of them reads the paper, not the story.

Does a marketing system add value when selling a small business?

Yes. A documented marketing system that the business owns outright makes revenue predictable and transferable, and buyers pay for both. A marketing system the buyer cannot log into, or one that runs on the owner's personal accounts and personal relationships, adds nothing at closing and sometimes subtracts.

This is The Big M problem. The McDonald brothers kept the building and lost the name, and the name turned out to be the business. Plenty of owners discover in diligence that they own the trucks while someone else owns the name: the domain is registered to a web developer who moved away in 2019, the Google Ads account belongs to the agency, the Google Business Profile sits under a former office manager's personal Gmail, and twelve years of customer history live in a spreadsheet on the owner's laptop. The Company Town Website, Tocobaga's earlier look at who really owns a law firm's website, walks through how that happens. In a sale, it turns into a closing condition.

E-commerce sellers get hit hardest. A Shopify brand doing $4 million a year whose Meta ad account, pixel history and email list sit inside a freelancer's business manager is selling a storefront without a parking lot. The buyer can see the revenue. The buyer cannot see how to keep it coming, and a buyer who cannot see it will not pay for it.

What a buyer wants is documented lead flow, the marketing equivalent of a proof of cash. Take the Pasco County HVAC company again. Suppose it spends $8,000 a month on paid search at $110 per lead. That buys about 73 leads. If 30 percent become replacement estimates and 40 percent of those close, the company installs almost nine systems a month at an average ticket of $11,000, roughly $96,000 of install revenue from $8,000 of spend. Tracked monthly in a CRM for 24 months, that is an engine a buyer can underwrite and a lender can believe. Living in the owner's head as "the phone rings," it is a handshake. The Map Is Not the Pump, Tocobaga's piece on proving marketing ROI, lays out the tracking that turns the first version into the second.

The marketing system also feeds the two traits that drive the biggest multiples. Recurring maintenance agreements are a marketing product before they are an operations product, and PitchBook ties the 10 to 12 times EBITDA valuations to exactly that combination of recurring revenue and strong retention.‖‖ A review profile with hundreds of recent reviews in the company's name, a CRM that remembers every customer's equipment age, and a website that ranks for the services the business wants to sell are assets that survive the owner's exit. A great reputation that lives in the owner's handshake does not.

What should an owner do 12 to 24 months before selling a business?

Twelve to 24 months before selling, an owner should clean up the books, cut owner dependence, reduce customer concentration, build recurring revenue and move every marketing account into the company's name. Lenders test the last fiscal year or a two-year average of historical earnings, never projections, so every improvement has to show up in the numbers before the listing does.††

The payoff justifies the effort. On a business with $300,000 of SDE, moving from 2.3 times to 3 times is worth $210,000. Here is the order of operations:

• Move to accrual-basis financial statements reviewed by a CPA, and make sure the books, the tax returns and the bank deposits tie to the dollar.

• Stop running personal expenses through the business, or document every one that remains with receipts and a written policy.

• Commission a sell-side quality of earnings review, so every add-back that would fail gets fixed or dropped before a buyer finds it.

• Promote or hire a general manager, and write down how the business runs: dispatch, pricing, purchasing, hiring and the weekly scorecard.

• Move key customer, vendor and referral relationships from the owner's cell phone to the team, and put the biggest accounts under written agreements.

• Shrink the largest customer's share of revenue by growing everything around it.

• Build recurring revenue: maintenance agreements, service plans, retainers or subscriptions that renew without a sales call.

• Put every marketing asset in the company's name: domain, hosting and website admin, Google Ads, Meta, Google Business Profile, CRM, call tracking and the email list.

• Track lead flow monthly by channel for at least 12 months: spend, cost per lead, booking rate, close rate and average ticket.

• Get an independent valuation, and sit down with a CPA and an M&A attorney about deal structure, asset versus stock sale, and how any seller note or earnout will be taxed and secured.

Nothing here is financial, tax or legal advice. It is the order of operations that keeps an owner's number on the contract instead of in a story.

Who can help make a business's marketing transferable before a sale?

An owner preparing to sell needs a CPA for the books, an M&A attorney for the contract, a broker or investment banker for the buyers, and someone to turn the marketing into a documented system the next owner can run. That last job is the one Tocobaga does.

Tocobaga has produced more than 300 websites, executed more than 600 integrated campaigns and written more than 30 business plans for small and mid-sized businesses, from home services companies to PE-backed platforms to professional services firms. For an owner 12 to 24 months from a sale, the work looks like an audit of who owns which accounts, a cleanup that moves every one of them into the company's name, tracking that turns lead flow into a monthly report a buyer can underwrite, and a marketing plan written for the next owner instead of the current one. An intro call at (813) 534-1261, or a note to hello@solvinghow.com through SolvingHow.com, is the place to start. The model is short: flat fees, never a percentage of ad spend, no auto-renewing contracts, the client owns every account and asset, and no Tocobaga name at the bottom of the client's website. Tocobaga is not for everyone, and when it is not the right fit, it will say so and point the owner somewhere better.

What did the McDonald brothers' sale teach about valuing a business?

The McDonald brothers' sale teaches that the price of a business is the number written into the contract, and everything else is a story both sides will remember differently. Dick and Mac McDonald got $2.7 million because somebody wrote $2.7 million down.†

Everything they did not write down went somewhere else. The name went to Kroc. The original restaurant became The Big M and lost to a McDonald's a block away. By 1965, Kroc had more than 700 restaurants in 44 states.* The half percent on a handshake, if it ever existed, became a family story with a price tag of "probably billions," told by a grandson more than five decades later.§ Nobody disputes the $2.7 million. Everyone argues about the handshake.

A small business sale in 2026 has the same anatomy. The add-backs, the earnout, the seller note on standby, the promise that the biggest customer will stay, the consulting role, the agency's ad account that nobody thought to transfer: each one is either written, documented and tied to the bank, or it is a handshake. Buyers know the difference. Lenders now require it. The only person who can turn handshakes into paper before the buyer arrives is the owner, and the window to do it is the 12 to 24 months before the listing.

The number on the contract is the valuation. Everything on a handshake is a story, and stories don't clear escrow.

What is the rule of thumb for valuing a small business?

The common rule of thumb in 2026 is a multiple of seller's discretionary earnings, roughly 2 to 3 times for businesses selling under $1 million and 3 to 4 times above that. BizBuySell's third-quarter 2026 data showed average cash flow multiples of 2.30 for sub-$1 million deals and 3.73 for larger ones. A rule of thumb sets the starting range. The buyer's diligence on the quality of those earnings sets the final price.

What add-backs are allowed when valuing a small business?

Legitimate add-backs are expenses that will not continue under a new owner: the owner's salary and payroll taxes, owner health insurance and retirement contributions, interest, depreciation, and documented one-time costs. Add-backs that often fail review include family members on payroll who do real work, "one-time" costs that recur every year, and personal expenses without receipts. A quality of earnings review tests each one against bank records and the general ledger.

Does the SBA allow seller financing when buying a business?

Yes, with limits. Under SBA rules in effect since June 2025, a seller note counts toward the buyer's 10 percent equity injection only if it sits on full standby, with no principal or interest payments, for the life of the SBA loan, and only for up to half of the injection. The October 2026 update, SOP 50 10 8.1, kept that half-of-the-injection cap for seller debt and other limited sources.

How much does a quality of earnings report cost for a small business?

For businesses with an enterprise value under $5 million, a limited-scope buy-side quality of earnings review typically runs $20,000 to $35,000 and takes four to six weeks, according to 2026 pricing published by advisory firm BD Emerson. Sell-side reviews cost 10 to 30 percent more. Under SBA SOP 50 10 8.1, acquisitions priced at $3 million or more must have one, including a proof of cash.

How often do earnouts actually pay out?

Less often than sellers expect. SRS Acquiom's 2026 analysis of private-target deals found sellers have collected about 21 percent of the maximum potential earnout dollars, and roughly 59 percent of non-life-sciences earnouts paid something. When lower middle market earnouts paid at all, the median was 43 cents on the dollar. A seller should value an earnout at a fraction of its face amount and negotiate the drafting hard.

Who buys small HVAC and plumbing companies?

Four groups dominate: private equity platforms adding local brands, individual acquisition entrepreneurs using SBA loans, larger local competitors, and occasionally employees through an ESOP. PitchBook counted 55 private equity HVAC deals in North America and Europe in 2024, up 72 percent from 2023. Platforms tend to pay the most for businesses with recurring maintenance revenue, clean books and a general manager who already runs the day.

How long before selling should an owner start preparing?

Twelve to 24 months is the practical minimum. Lenders test the last fiscal year or a two-year average of historical earnings, and under SBA SOP 50 10 8.1 projections cannot be used to meet debt coverage. That means the cleanup, the reduced owner dependence and the documented marketing results must already show up in the financial statements before the business is listed for sale.

Sources

*

Entrepreneur Staff. "Ray Kroc: Burger Baron." Entrepreneur, October 9, 2008. Kroc's Multimixer sales, the San Bernardino order for eight machines, the 1.9 percent and half-percent royalty split, the April 1955 Des Plaines opening, 18 first-year franchises, the 1961 $2.7 million cash buyout, the dispute over the original restaurant, The Big M, the new McDonald's one block away, Kroc's remark to a longtime employee, and more than 700 restaurants in 44 states by 1965. https://www.entrepreneur.com/article/197544

†

Brancaccio, David. "The true origin story behind McDonald's." Marketplace, February 9, 2017. Interview with author Lisa Napoli: the half-percent royalty, the $2.7 million price as a million dollars per brother plus $700,000 for taxes, Harry Sonneborn finding the money through the investors known as the 12 apostles, and Napoli's view that Kroc did not cheat the brothers out of the half percent. https://www.marketplace.org/2017/02/09/ray-kroc-mcdonalds-fast-food/

‡

Hamburger, John. "Ray Kroc, Not the Founder, but a Financial Engineer." Restaurant Finance Monitor, June 21, 2017. Dick McDonald naming the $2.7 million price, roughly $200,000 in annual royalties at the time of the sale, the price at about 13.5 times that amount, and the absence of any handshake royalty in Kroc's autobiography, in early employee Donn R. Wilson's recollection, or in the brothers' public statements. https://www.restfinance.com/restaurant-finance-across-america/ray-kroc-not-the-founder-but-a-financial-engineer/article_a3d94b01-60db-5a81-9ac9-6e1ec10d8d28.html

§

Chakelian, Anoosh. "The secret anti-capitalist history of McDonald's." New Statesman, February 17, 2017. Jason McDonald French's account of a handshake deal Kroc did not honor, the family's claim that the half-percent annual royalty was never received, and his estimate that it was "probably billions of dollars." https://www.newstatesman.com/culture/food-drink/2017/02/secret-anti-capitalist-history-mcdonald-s

‖

BizBuySell. "BizBuySell Insight Report: Q3 2026." BizBuySell, October 2026, accessed October 26, 2026. 2,132 transactions and a $350,000 median price; sub-$1 million deals at $123,000 median cash flow, $250,000 median price and 2.30x; deals above $1 million at $559,000, $1.8 million and 3.73x, a record 22 percent of transactions; service, manufacturing, restaurant and retail figures; and broker quotes from Fred Petito, Vipin Singh and Jake McDonald. https://www.bizbuysell.com/insight-report/

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CoStar Group. "BizBuySell Releases Q3 2026 Insight Report." CoStar Group Investor Relations, October 20, 2026. Median sale price up 17 percent, cash flow multiples up 2.6 percent, buyer confidence of 49 and seller confidence of 47, 27 percent of owners planning to sell considering selling sooner, and Bob House's statement on what buyers want. https://investors.costargroup.com/news-releases/news-release-details/bizbuysell-releases-q3-2026-insight-report

**

McFarland, Leland. "Small Business Acquisitions Drop 10% as Buyers Get More Selective." Small Business Trends, August 11, 2026. BizBuySell's second-quarter 2026 average cash flow multiple of 2.7 and revenue multiple of 0.7. https://smallbiztrends.com/small-business-acquisitions-drop-10-as-buyers-get-more-selective/

††

O'Brien, Katie. "Best Practices: Change of Ownership Transactions Under SOP 50 10 8.1." Starfield & Smith, September 9, 2026. The October 1, 2026 effective date, the non-reducible 10 percent injection for initial acquisitions, the half-of-the-injection cap on seller debt and other limited sources, 1.25 debt coverage on historical earnings with no projections, the 24-month seller consulting limit, the $3 million QoE threshold, the bar on 7(a) small loans for ownership changes, and the ESOP category. https://starfieldsmith.com/2026/09/best-practices-change-of-ownership-transactions-under-sop-50-10-8-1-what-sba-lenders-need-to-know/

‡‡

International Business Brokers Association and M&A Source. "Market Pulse Q2 2026 Highlights." IBBA, August 2026. Deals of $2 million and under priced on SDE and deals of $2 million to $50 million on EBITDA, and Chairman James Parker's comments that "the market is not moving in one direction" and that the smallest deals are most sensitive to financing and operating risk. https://www.ibba.org/wp-content/uploads/2026/08/mp-highlights-q2-2026.pdf

§§

Business Valuation Resources. "Pepperdine releases '2026 Private Capital Markets Report.'" BVWire, July 15, 2026. A median expected private equity return of about 20 percent for companies with $1 million to $5 million of EBITDA, 25 percent in the midmarket, and a 15 percent median discount for lack of marketability among appraisers. https://www.bvresources.com/articles/bvwire/pepperdine-releases-2026-private-capital-markets-report

‖‖

Corridore, Jim. "Clearing the Air on HVAC." PitchBook Analyst Note, June 11, 2025. 55 private equity HVAC deals in North America and Europe in 2024, up 72 percent from 32 in 2023 and the most since at least 2017; service-heavy businesses with recurring revenue at 10x to 12x EBITDA or more; and the roughly $1.5 billion Sila Services buyout. https://files.pitchbook.com/website/files/pdf/Q2_2025_PitchBook_Analyst_Note_Clearing_the_Air_on_HVAC_19463.pdf

¶¶

Sakal, Leslie. "How Much Does a Quality of Earnings Report Cost?" BD Emerson, July 25, 2026. $20,000 to $35,000 for a limited-scope buy-side review under $5 million of enterprise value, four to six weeks of work, sell-side work 10 to 30 percent higher, and the add-backs that take the most testing time. https://www.bdemerson.com/article/quality-of-earnings-report-cost

***

Doeren Mayhew. "SOP 50 10 8.1: What SBA Lenders Should Be Thinking About Before Oct. 1." Doeren Mayhew, August 24, 2026. A required quality of earnings review for acquisitions of $3 million or more, with a cash proof covering the trailing 12 months and the last two fiscal years, and the requirement that lenders use QoE earnings in the debt service coverage test. https://www.doeren.com/viewpoint/sop-50-10-8-1-what-sba-lenders-should-be-thinking-about-before-oct-1

†††

Reuters. "US banks raise prime rate after Fed decision." Kitco News, September 16, 2026. JPMorgan, KeyCorp and BNY raised their prime lending rate to 7 percent from 6.75 percent after the Fed's quarter-point hike, its first since 2023. https://www.kitco.com/news/off-the-wire/2026-09-16/us-banks-raise-prime-rate-after-fed-decision

‡‡‡

McCarthy, Charles R. "SBA Issues SOP 50 10 8: Key Changes Impacting SBA 7(a) Lending." Whiteford, Taylor & Preston, May 6, 2025. The 10 percent equity injection effective June 1, 2025, seller notes counting only on full standby for the loan term and for no more than half the injection, the two-year personal guarantee for sellers who retain equity, and the 100 percent U.S. citizen, permanent resident or national ownership rule. https://www.whitefordlaw.com/news-events/client-alert-sba-issues-sop-50-10-8-key-changes-impacting-sba-7a-lending

§§§

SRS Acquiom. "2026 M&A Earnout and Milestone Trends." SRS Acquiom, 2026, accessed October 26, 2026. Earnouts in 24 percent of 2025 private-target deals versus 17 percent in 2014 to 2022, 30 percent in the lower middle market, 24 percent of PE buyer deals versus 13 percent, 59 percent of non-life-sciences earnouts paying something, about 21 percent of potential earnout dollars paid, about 50 cents on the dollar when partly successful, and a 43-cent lower middle market median. https://learn.srsacquiom.com/rs/664-KLJ-520/images/2026-ma-earnout-and-milestone-trends.pdf?version=1

‖‖‖

Rothwell, Jonathan. "Most Small-Business Owners Lack a Succession Plan." Gallup, March 24, 2025. 52.3 percent of U.S. employer businesses, about 3 million of nearly 6 million, owned by people 55 or older, and among owners 55 and up, 17 percent planning to sell or transfer within five years and 13 percent planning to close. https://news.gallup.com/poll/657362/small-business-owners-lack-succession-plan.aspx

¶¶¶

Zhukova, Elena. "Search Funds Keep Offering a Proven Path to Ownership." Stanford Graduate School of Business, July 13, 2026. The 2026 Search Fund Study's 850-plus search funds since 1996, 58 percent acquisition rate, roughly 20 months to acquisition, 33.9 percent aggregate IRR, 4.75x return on invested capital and $16 million median purchase price for 2024 to 2025 deals. https://www.gsb.stanford.edu/index.php/insights/search-funds-keep-offering-proven-path-ownership