Owners usually hear a rule of thumb, a multiple someone mentioned at a conference, and anchor to it. The number is real but incomplete. Here is how the math actually works for a community sports business under a million dollars of earnings.
Step one: normalize earnings
Start with net profit. Add back your own compensation, personal expenses that run through the business, one time costs, and non cash items like depreciation. That figure, seller's discretionary earnings, is what a buyer is actually purchasing. It is often much larger than the profit on your tax return, which is why the return alone understates what you own.
Step two: apply a multiple that reflects risk
The multiple is a risk score in disguise. Every question a buyer asks is really asking how much of these earnings survive without you.
- Revenue quality. Recurring dues and enrollments beat seasonal and one time revenue.
- Concentration. If one contract or one program is half the revenue, the multiple drops.
- Owner dependence. The more the business is you, the lower the number.
- Facility control. Owned real estate, a long lease, or a secure municipal contract all help.
- Staff. Coaches who will stay after closing are worth real money.
- Condition. Deferred capital work gets subtracted, usually more aggressively than you would.
Step three: handle the real estate separately
If you own the building, you own two assets: an operating business and a piece of real estate. They should be valued separately. Many owners sell the business and keep the property, becoming the landlord with a long lease in place. That can produce more total value and a steady retirement income.
What moves your number the most
In our experience, three things: lease or facility security, the share of revenue that is recurring, and whether a competent operator could run the place without calling you. Fixing any one of them before a sale is usually worth more than a year of margin improvement.
What a valuation conversation should feel like
You should leave it knowing not just a number but why. A buyer who cannot explain which factors pushed your value up and which pulled it down is either not being straight with you or has not done the work. Ask for the reasoning, and ask what you could change to move it.