It is a simple concept, but it is often forgotten. A buyer will only pay what they can afford.
When selling/buying a small business, affordability is generally determined based on the operational cash flow generated by the business. Out of this cash flow, a new owner will have to pay him/herself, pay debt service, provide for a return on capital, fund a contingency, and invest in near-term growth initiates. If a buyer can’t afford to pay for these items based on a certain purchase price, then they will either pay less or shift risk to the seller via the terms of the deal.
So, if you are selling/buyer a small business, you must put yourself in the other party’s shoes to think through this dynamic.