Business Valuation

The business valuation calculator shows what your business is worth. It uses three methods: SDE multiples (2–4× for Main Street businesses under $1M profit), EBITDA multiples (4–7× for mid-market), and DCF analysis. Small businesses are usually priced as a multiple of annual SDE. Enter your earnings, owner's pay, and growth rate to see your range. You may need a value for many reasons — planning a sale, seeking a loan, adding a partner, or handling a divorce or estate. Each reason may call for a different method.

A business valuation is not one formula. It is a negotiation backed by data. Small businesses are usually priced as a multiple of seller's discretionary earnings (SDE), and the multiple varies widely by industry: businesses with recurring revenue and low labor needs tend to command higher multiples than owner-dependent, operations-heavy businesses such as full-service restaurants.

The three valuation methods this calculator applies:

• SDE Multiple Method: First find your annual Seller's Discretionary Earnings. Then multiply by an industry multiple. This method fits Main Street businesses under $2M revenue, where one owner runs day-to-day work. The SBA (sba.gov) uses it as the main method for small business acquisition loans.
• EBITDA Multiple Method: Used for larger businesses ($2M–$50M revenue) where a management team runs the company and the owner steps back. EBITDA multiples usually land at 4–8× for lower-middle market businesses. It matters most when the buyer is a private equity group, strategic buyer, or big lender.
• Discounted Cash Flow (DCF): Projects future cash flows. Discounts them back to today's value using a risk-adjusted rate. This is the strongest method for businesses with steady, repeat revenue — SaaS, subscription models, and long-term contracts. It needs 3–5 year cash flow forecasts and a defensible discount rate (usually 15–30% for private businesses).

Each of the three main methods uses different inputs. Each fits a different buyer type.

SDE multiples by industry: multiples run higher for businesses with recurring revenue, low labor needs or license protection (car washes, laundromats, software, liquor stores) and lower for operations-dependent or key-person businesses (full-service restaurants, law firms). Check BizBuySell's industry multiples for current figures.

For current industry multiple data, see BizBuySell's transaction data and business brokerage analysts. See also SBA resources on business transfer.

1. Calculate Seller's Discretionary Earnings (SDE) with careful add-backs. Start with net profit from the last 12 months (trailing twelve months, or TTM). Add back your own salary and any pay to family members who don't work in the business. Add back personal expenses run through the business (car, phone, travel). Add back non-cash charges (depreciation and amortization). Add back one-time costs (a legal dispute, an equipment swap). Add back interest expense. What you get is SDE — the total pre-tax value to a working owner-operator. Example: Net profit $120,000 + owner salary $80,000 + personal auto $6,000 + depreciation $12,000 = SDE $218,000.
2. Choose the right SDE multiple for your industry and quality. Industry averages are a starting point. Your real multiple depends on other factors: recurring vs one-time revenue, customer concentration (does one client bring in more than 20%?), lease terms, staff tenure, systems and process quality, online presence, proprietary products, and growth. Strong recurring revenue, clear systems, and steady growth push your multiple to the top of the range. Owner-dependent, shrinking, or single-client businesses trade at a discount. A $218,000 SDE HVAC company with solid contracts and a trained team may earn 3.2× = $697,600. The same SDE with poor records and owner-dependent clients may only clear 2.2× = $479,600.
3. Adjust for balance sheet items and working capital. The SDE multiple gives an "enterprise value" that covers the assets needed to run the business. Handle these items in a separate negotiation: (a) real estate (often not included), (b) which vehicles and equipment are in or out, (c) inventory at cost, (d) whether accounts receivable stay with the seller, and (e) any liabilities the buyer takes on. A $700,000 enterprise value with $50,000 in net working capital included works out to $650,000 for the operating business plus $50,000 in working capital.
4. Run a DCF for businesses with steady cash flow. Project free cash flow (FCF) for the next 3–5 years using realistic growth. Apply a discount rate that reflects the business's risk; small private businesses warrant a high one. That rate covers the illiquidity premium and the risk of owning a private company — far above the 8–10% used for public markets. Calculate a terminal value with a conservative exit multiple or the Gordon Growth Model. The DCF checks the SDE multiple result against fundamentals.
5. Cross-check with recent sale data. Look up recent sales of similar businesses on BizBuySell.com, BizQuest, IBBA (International Business Brokers Association), or your state's broker database. Match on size ($500K–$2M revenue is a fair range), geography, and operating model. If comps cluster at 2.5× SDE and your number is 4×, either justify the premium or lower your figure. Buyers using SBA loans pay close attention to how a lender will appraise the deal.
6. Weight the three methods based on which fits best. For a $500,000 revenue owner-run service business: SDE multiple 60%, comparable sales 30%, DCF 10%. For an $8M recurring-revenue SaaS business: DCF 50%, EBITDA multiple 40%, SDE 10%. The blended number is a defensible range, not one point. Most formal valuations show a range (e.g., $680,000–$750,000) in any report or offer negotiation.

A business valuation is not a price. It is the start of a negotiation, backed by data. Knowing what pushes the multiple up or down — and how buyers and lenders see value in different ways — matters for both sides. Sellers want to lock in strong exit proceeds. Buyers want to avoid overpaying.

What Increases a Business's Multiple

• Recurring revenue: Monthly retainers, subscriptions, maintenance contracts, and memberships are worth a real premium over one-time revenue. A business with 70% recurring revenue can trade at 1.0–1.5× higher multiple than an identical-SDE transactional business.
• Transferability: If the owner handles all client relationships, does the key technical work, or is the face of the brand, the business trades at a deep discount. Businesses with written Standard Operating Procedures (SOPs), trained managers, and clear systems earn higher multiples because a new owner can step in without the business breaking down.
• Customer diversification: buyers check how much revenue depends on the largest customers. Heavy concentration often leads buyers to ask for a price cut or an earnout.
• Growth trajectory: Three years of steady 15–20% revenue growth earns a premium over flat or falling revenue. Buyers pay for momentum.

SBA Financing and Its Impact on Price Many small business acquisitions use SBA 7(a) loans. These can finance most of the purchase price. SBA lenders require an independent valuation (usually SDE or EBITDA multiple-based). They only lend if the business's cash flow covers the loan payment with a margin the lender sets. That means the price an SBA buyer can pay is capped by cash flow — not just the multiple. Take a business with $200,000 SDE and an $800,000 asking price. An $800,000 SBA loan at 10% over 10 years runs about $9,400/month. After that debt payment, the buyer still needs enough to live on. If SDE minus debt service is too low, the lender will not approve the loan at that price.

Earnouts: Bridging the Valuation Gap

Buyers and sellers often disagree on value. Usually the seller sees a rosier future than the buyer. An earnout bridges the gap. The seller gets a smaller payment at closing. Extra payments come later if the business hits agreed revenue or profit targets over 1–3 years. Earnouts are common for growing businesses where the seller believes the growth curve justifies a higher price. For a seller, earnouts add risk — the new owner's calls decide if targets are met. For a buyer, they tie the price to actual results.

Tax Allocation of the Purchase Price

In an asset sale (the usual structure for small businesses), the purchase price must be split among asset classes under IRS Form 8594. Each class has a different tax rule. Buyers want faster depreciation. Sellers want capital gains rates instead of ordinary income rates. Goodwill is a capital gain for the seller but the buyer must write it off over 15 years. Inventory and receivables count as ordinary income for the seller. The split can matter as much as the headline price. It can shift each side's tax bill by hundreds of thousands of dollars. Hire a CPA with deal experience well before closing.

• Start exit planning 2–3 years before your target sale date. Most value moves take time to show up in the numbers. Buyers often apply multiples to a multi-year SDE average, not just the last year. Starting early lets you clean up the P&L (pull out personal expenses), grow recurring revenue, build management depth, and fix any legal or lease issues buyers will flag in due diligence. A business prepared for sale with clean multi-year financials usually sells for more than one sold in a hurry.
• Grow recurring revenue in the 2–3 years before you exit. Move customers to service agreements, maintenance contracts, retainers, or subscriptions. This lifts your multiple, not just your SDE. A $50,000 increase in annual recurring revenue can add $75,000–$150,000 in value if it shifts your multiple from 2.5× to 3.0× on higher SDE. Show new revenue in terms of annual contract value and renewal rates. Those are the numbers buyers and lenders can underwrite.
• Document and systematize — build a business that runs without you. Buyers pay a premium for businesses they can operate. Write SOPs for every core process. Cross-train staff so no one person (including you) is irreplaceable. Set up management reports that do not need your daily input. Hiring a strong general manager 12–18 months before sale does two things: it proves the business is transferable, and it frees your time to focus on growth. That is a win on both sides.
• Clean up your financials — pull all personal expenses out of the business. Buyers and lenders study add-backs closely. Too many personal add-backs signal weak financial hygiene and raise questions about the quality of earnings. In the 2–3 years before sale, run a "buyer-ready" P&L. Pay yourself a market-rate salary on the books. Take personal vehicle, travel, and entertainment out of the business. Make sure all revenue is booked properly. Buyers apply lower multiples when add-backs are too many or unclear.
• Fix customer concentration before you go to market. If one customer dominates revenue, diversify first. Bring in two or three new major customers. Grow small accounts. Launch a new product or service that cuts your reliance on the big client. A business that lists with 35% revenue from one client will face a price cut, a deal-killing earnout, or both. Fixing concentration is one of the highest-return pre-sale moves you can make.
• Lock in long-term lease terms before listing. Buyers and lenders are picky about leases. A 12-month lease with uncertain renewal wipes out value fast for a location-dependent business. Get a lease with at least 3–5 years left (plus renewal options) before you go to market. Many landlords will negotiate favorable terms once they know the sale will not disrupt tenancy. A below-market rent is itself an asset — it shows up in the SDE and the multiple.
• Hire a business broker or M&A advisor — the commission pays for itself. Brokers charge 10–15% commission on deals under $1M and 5–10% on larger deals (Lehman scale). A 10% commission on a $700,000 deal is $70,000. Weigh the broker's fee against their reach to buyers and help closing the deal. Brokers keep buyer lists, run confidential marketing, and manage the tough due diligence and negotiation stages. The International Business Brokers Association (IBBA) certifies Certified Business Intermediaries (CBIs) who meet its training and experience standards.

Business valuation multiples are applied to EBITDA or SDE. That means your valuation is only as good as those numbers. Use the EBITDA calculator to pull your earnings before interest, taxes, depreciation, and amortization straight from your P&L. For small businesses where the owner works in the company, the formula is simple: SDE = EBITDA + owner's salary + owner perks + one-time expenses. The cash flow analyzer can verify your operating cash flow matches your reported EBITDA.