Contents:
- Getting Ready to Value a Business
- Method 1: Seller’s Discretionary Earnings (SDE) Multiple
- Method 2: EBITDA Multiple
- Method 3: Asset-Based Valuation
- Method 4: Market Comparison (Comps)
- Method 5: Discounted Cash Flow (DCF)
- SDE vs. EBITDA: The Key Difference
- What a Valuation Typically Costs
- A Real Example
- Pro Tips for a Stronger Number
- Frequently Asked Questions
- Which valuation method is most accurate?
- How much does a professional business valuation cost in 2026?
- Can I value my own business without a professional?
- Does valuation differ by industry?
A company that earns $200,000 a year can be worth $400,000 to one buyer and $900,000 to another, and both numbers can be defensible. Valuation is not a single formula; it is a set of lenses, and the lens you choose changes the picture. Anyone preparing to sell, buy, or simply understand what their business is worth needs to know which lens fits their situation.
Getting Ready to Value a Business
Before running any numbers, gather three years of financial statements, a current balance sheet, and a list of owner add-backs such as personal vehicle payments or above-market salary. Clean books turn a rough guess into a credible number, and messy books can knock 10% to 20% off a final offer.
Method 1: Seller’s Discretionary Earnings (SDE) Multiple
SDE adds back owner salary, personal expenses, and one-time costs to net income, then multiplies that figure by an industry benchmark, often 2x to 3x for small local businesses. A landscaping company earning $150,000 in SDE at a 2.5x multiple lands near $375,000. This is the most common method for businesses under $1 million in revenue because it reflects what a single owner-operator can actually take home.
Method 2: EBITDA Multiple
Once a company outgrows a single owner, buyers switch to EBITDA (earnings before interest, taxes, depreciation, and amortization). A regional HVAC company with $600,000 in EBITDA and a 4x multiple is valued around $2.4 million. Multiples climb with size and management depth that doesn’t depend on the founder.
Method 3: Asset-Based Valuation
This method totals tangible and intangible assets minus liabilities. It suits asset-heavy businesses like equipment rental yards, but it often undervalues service businesses where the real worth is client relationships, not machinery.
Method 4: Market Comparison (Comps)
Comps look at recent sale prices of similar businesses, much like a home appraisal. Brokers pull from databases like BizBuySell to find comparable deals. A coffee shop chain that just sold for 2.2x revenue in Ohio gives a useful benchmark for a similar shop nearby.
Method 5: Discounted Cash Flow (DCF)
DCF projects future cash flows, often five years out, and discounts them to today’s dollars using a rate that reflects risk, typically 15% to 25% for small businesses. This suits companies with predictable, growing revenue, but it is sensitive to overly optimistic projections.
SDE vs. EBITDA: The Key Difference
People often confuse these two. SDE assumes one owner-operator draws a full salary; EBITDA assumes a management team runs it without the owner. Using SDE on a $3 million company, or EBITDA on a solo operation, distorts the number.
What a Valuation Typically Costs
- Online valuation calculator: free, rough estimate only
- Business broker opinion of value: $500–$1,500, often free if listing with them
- Certified business appraisal (CVA or ASA credential): $3,000–$7,500
- Full audit-backed valuation for litigation or estate purposes: $8,000–$15,000
A Real Example
A couple in Ohio who owned a small bakery believed it was worth $600,000 based on what they had invested over eight years. A certified appraiser calculated SDE at $95,000 and applied a 2.1x multiple, landing at $199,500. The gap between emotional value and market value is one of the most common reasons deals stall.
Pro Tips for a Stronger Number
- Document every add-back with receipts; unsupported ones get rejected by lenders.
- Get two independent valuations if the business is worth more than $1 million.
Frequently Asked Questions
Which valuation method is most accurate?
None is universally accurate. SDE multiples work best under $1 million in revenue, EBITDA multiples work best above that, and combining two methods gives the most defensible range.
How much does a professional business valuation cost in 2026?
Expect $3,000 to $7,500 for a certified appraisal, or $500 to $1,500 for a broker’s informal opinion of value.
Can I value my own business without a professional?
Yes, using SDE or EBITDA multiples from industry reports, but a self-calculated number carries less weight with buyers and lenders than a certified appraisal.
Does valuation differ by industry?
Yes. A software company might sell at 4x to 6x EBITDA due to scalability, while a landscaping business typically sells at 2x to 3x SDE.
