Who this is for: Business owners who want to understand what their company is worth before selling, bringing on a partner, applying for a loan, or planning an estate.

Knowing what your business is worth is not just a selling exercise. It informs decisions about expansion, financing, partnerships, and succession. Yet most small business owners have no idea what their company would actually fetch on the open market. Sites like Investopedia, NerdWallet, and Hustler’s Library cover the basics, but this guide goes deeper into each method and what actually moves the needle on your number.

Why Business Valuation Varies So Much

Unlike real estate, where comparable sales provide a reliable baseline, business valuation is part science and part negotiation. Two identical businesses in the same industry can sell for very different multiples based on growth trajectory, contract terms, team quality, and buyer motivation. Understanding the inputs helps you improve your position before you ever talk to a buyer.

For a broader view of what drives business value, see our guide to business valuation methods: EBITDA vs revenue multiple vs asset-based.

Method 1: Seller’s Discretionary Earnings (SDE)

SDE is the most common valuation metric for owner-operated businesses with less than $1M in annual earnings. It captures the total economic benefit the business provides to a full-time owner-operator.

SDE = Net Profit + Owner’s Salary + Owner Perks + Depreciation + Amortization + Interest + One-Time Expenses

Once you have your SDE, you apply a multiple. Most Main Street businesses sell for 2-3x SDE. High-performing businesses with recurring revenue, strong systems, and consistent growth can reach 4-5x. Service businesses with high owner dependency typically land at the low end of the range.

What Counts as an Add-Back?

Add-backs are expenses that run through the business but benefit the owner personally, or that are one-time in nature. Common add-backs include: owner salary above market rate, personal vehicle expenses, personal insurance premiums, travel with personal components, and one-time legal or consulting fees. Every add-back must be documented and defensible to a buyer’s accountant.

Method 2: EBITDA Multiples

For businesses with $1M+ in annual earnings, buyers shift from SDE to EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). EBITDA strips out financing and accounting decisions to show the true operating profitability of the business.

EBITDA multiples vary significantly by industry. Here are typical ranges based on lower-middle-market transaction data:

Method 3: Asset-Based Valuation

Asset-based valuation focuses on the net value of what the business owns: total assets minus total liabilities. There are two variations:

• Book value: Assets at their accounting (depreciated) value. Usually the lowest number.
• Liquidation value: What you would actually get if you sold everything today, often below book for specialized equipment and above book for real estate.
• Adjusted net asset value: Assets restated at fair market value, which is more accurate and more commonly used in actual transactions.

Asset-based valuation is used when the business has minimal earnings (early-stage, seasonal, or declining), significant tangible assets like real estate or heavy equipment, or when a buyer is primarily interested in the assets rather than the ongoing business.

Method 4: Revenue Multiples (SaaS and High-Growth)

For SaaS businesses and high-growth technology companies, revenue multiples are often more relevant than earnings multiples, especially when the company is investing heavily in growth and earnings are intentionally suppressed. Annual Recurring Revenue (ARR) is the standard metric.

A SaaS business with $2M ARR growing at 40% annually with 90% gross margins and low churn might trade at 8-12x ARR. The same revenue with 30% churn and flat growth might command only 2-3x. The multiple reflects the predictability and durability of future revenue, not just the current top line.

Method 5: Discounted Cash Flow (DCF)

DCF is the academic gold standard for valuation: project future free cash flows and discount them back to present value using a required rate of return. In practice, DCF is rarely the primary method for small business transactions because the assumptions (growth rate, discount rate, terminal value) are too uncertain to be reliable for businesses without stable, predictable revenue.

DCF is more commonly used as a sanity check or in larger M&A transactions where financial modeling is part of the buyer’s process. For most small business sellers, SDE or EBITDA multiples will be the primary negotiating ground.

What Affects Your Multiple?

Two businesses with identical EBITDA can sell for very different multiples. Here are the factors that move the needle:

• Growth rate: A business growing 20% annually gets a higher multiple than one that is flat, because buyers are paying for future earnings, not just historical ones.
• Recurring revenue: Subscriptions, retainers, and long-term contracts reduce buyer risk and increase willingness to pay more.
• Customer concentration: If your top customer represents 30%+ of revenue, buyers will discount the price. Diversification matters.
• Owner dependency: If the business cannot run without you, the buyer faces a key-person risk. Document systems, train managers, and reduce your operational role before selling.
• Clean financials: Three years of well-documented, audited or reviewed financials remove uncertainty and justify asking price. See our guide on how to read a profit and loss statement to understand what buyers are examining.
• Industry tailwinds: Businesses in growing markets command higher multiples than those in declining industries.

For additional context on understanding your financial position, the SBA’s guide to strengthening your business covers financial management best practices that directly improve valuation.

Key Takeaways

• SDE multiples (2-5x) are the standard for owner-operated small businesses under $1M in earnings
• EBITDA multiples (3-8x depending on industry) apply to larger businesses
• SaaS and high-growth tech companies trade on ARR multiples, not earnings
• Asset-based valuation is used when earnings are minimal or assets are the primary value driver
• Growth rate, recurring revenue, customer concentration, and owner dependency are the biggest levers on your multiple
• Get a formal valuation from a professional before listing; do not rely on online calculators alone

Frequently Asked Questions

What is the most common way to value a small business?

For owner-operated small businesses, SDE multiples are the most commonly used method. A business generating $300K in SDE might sell for $600K-$900K at a 2-3x multiple. Larger businesses use EBITDA multiples instead.

How do I calculate SDE for my business?

Start with net profit from your tax return or P&L statement. Add back your owner’s salary, any personal expenses run through the business, depreciation, amortization, interest expense, and any non-recurring one-time expenses. The result is your SDE.

What is a good EBITDA multiple for a business?

It depends on the industry. Manufacturing and distribution typically trade at 4-6x EBITDA. Professional services at 3-5x. SaaS and technology at 6-12x or higher. A business with strong recurring revenue and documented growth trajectory can command a premium within its industry range.

Should I get a formal business appraisal?

If you are selling a business worth $500K or more, yes. A certified business appraiser (look for CBV or CBA credentials) provides an independent opinion that can support your asking price during negotiations and is sometimes required by lenders financing the purchase.

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