How to Value a Business: The Complete Guide
By BizCalculators Team · Last reviewed September 4, 2026
Common valuation methods: earnings multiple (SDE or EBITDA × 3-6), asset-based (assets − liabilities), and discounted cash flow. Most small businesses sell for 3-6x Seller's Discretionary Earnings (SDE). On $150,000 SDE, a 3.5x multiple values the business at $525,000. The multiple rises with growth, recurring revenue, and low owner dependence — and falls with customer concentration and key-man risk.
Why Business Valuation Matters
You need a defensible valuation whenever money changes hands: selling the business, buying one, raising equity, splitting ownership with a partner, or planning succession. Lenders also use valuation to size loans.
Valuation is part art, part math. The math is the method — applying a multiple to earnings or discounting future cash flows. The art is the multiple — how buyers weigh growth, risk, and how much the business depends on the owner. A business worth $400,000 to one buyer may be worth $600,000 to a strategic buyer who can fold it into their operations and cut costs.
The Earnings Multiple Method
The most common method for small businesses: take a normalized earnings figure and multiply it by an industry-typical multiple. For small businesses, the earnings figure is usually Seller's Discretionary Earnings (SDE) — net profit plus owner's salary, perks, and one-time costs, because the owner's compensation varies so much. For larger businesses, EBITDA (earnings before interest, taxes, depreciation, amortization) is the standard.
Typical multiples: small service businesses 2-4x SDE, established businesses with recurring revenue 3-6x SDE, and businesses with strong growth and contracts 5-8x EBITDA. On $150,000 SDE at 3.5x, the value is $525,000. The multiple is where all the qualitative factors get priced in.
What Raises and Lowers Your Multiple
Buyers pay more for predictable, transferable earnings. Multiple-boosters: recurring or contracted revenue, a diversified customer base (no single customer over 15-20% of sales), a management team that runs without you, documented systems, and growth trend. Multiple-killers: customer concentration, owner dependence, a handful of key employees, outdated equipment, or revenue that requires constant new-customer hunting.
You can actively raise your multiple before selling: lock in contracts, train a manager to run operations, reduce customer concentration, and clean up financial statements to a professional standard. Each improvement takes a year or more to show up in earnings history, so start early.
Asset-Based Valuation
Asset-based valuation values the business as its assets minus liabilities: equipment, inventory, receivables, and intangibles, minus what you owe. It's most appropriate for asset-heavy businesses — manufacturing, distribution, retail with owned inventory — and for businesses being liquidated rather than sold as a going concern.
For service businesses, asset-based valuation badly understates value because the real asset — customers, reputation, know-how — isn't on the balance sheet. That's why earnings multiples dominate for service and technology businesses. Use asset-based as a floor (what you'd get selling everything off) and the earnings multiple as the operating value.
Discounted Cash Flow (DCF) and When It's Used
DCF projects future cash flows and discounts them to present value using a discount rate that reflects risk. It's more rigorous than a multiple but requires assumptions about growth, margins, and discount rate — small changes in assumptions swing the value widely.
DCF is most useful for high-growth businesses where earnings multiples don't capture the trajectory, or when a buyer has a specific return target. For most small-business sales, a multiple on SDE or EBITDA is the practical method, with DCF used as a cross-check. Whatever method you use, get an independent view — the buyer's valuation will be lower, and knowing your number in advance protects you at the negotiating table.
Frequently Asked Questions
How much is my small business worth?
The most common answer: multiply your Seller's Discretionary Earnings (SDE) by 3-6. A business with $150,000 SDE at a 3.5x multiple is worth about $525,000. The exact multiple depends on growth, customer concentration, and how much the business depends on you. An independent valuation is worth the cost before a real sale.
What is Seller's Discretionary Earnings (SDE)?
SDE is the business's true earnings available to one full-time owner-operator: net profit plus owner's salary and perks, interest, depreciation, and one-time expenses, minus one-time income. Buyers use SDE rather than net profit because owner compensation varies so much between businesses.
What makes a business worth more?
Recurring revenue, a diversified customer base, a management team that operates without the owner, documented processes, and consistent growth. Customer concentration, owner dependence, and revenue that requires constant new-customer acquisition all lower the multiple.
Do I need a professional business valuation?
For a real sale, financing, or ownership change, yes — an accredited business appraiser or a CPA with transaction experience gives you a defensible number. For planning purposes, use the earnings multiple method yourself, but understand buyers will discount your optimism.