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Free buyer resource · ValuationValue a business before you offer
A plain-English method for working out what a small business is really worth, and how to sanity-check the asking price.
Free guide · No fees for buyersMost small businesses are valued by recasting the profit and loss statement to Seller's Discretionary Earnings (SDE), then multiplying SDE by a market multiple, typically in a range of about 2 to 4 times for Main Street businesses. Larger businesses with a management team are usually valued on EBITDA. The multiple moves up or down with growth, risk, owner dependence and recurring revenue.
The asking price on a listing is the seller's opening position, not a valuation. Doing your own numbers protects you from overpaying and gives you a clear basis for negotiation.
This free guide walks through the same method lenders and brokers use. For a large or complex deal, a formal valuation from a credentialed appraiser or accountant is worth the cost.
How to do it
Collect three years of financials
Get profit and loss statements, balance sheets and business tax returns for at least the last three years, plus year-to-date figures. Check that the tax returns and the P&L tell the same story.
Recast the earnings
Start with net profit and add back the owner's salary, interest, depreciation, amortisation, one-off costs and genuine personal expenses run through the business. The result is SDE. Be strict: every add-back should be documented.
Choose SDE or EBITDA
Use SDE when one owner-operator runs the business. Use EBITDA, which keeps a market-rate manager's salary as a cost, when the business is larger or run by a team.
Find a market multiple
Compare with sold businesses of a similar type, size and location. Industry reports, broker data and your adviser can help. Use sold prices, not asking prices.
Adjust for risk and quality
Raise the multiple for recurring contracts, steady growth, diverse customers and a strong team. Lower it for declining sales, customer concentration, a short lease or an owner who is the business.
Check the price against the debt
Work out whether the earnings can cover loan payments and still pay you a living. If they cannot, the price is too high for you, whatever the multiple says.
Options compared
| Method | How it works | Best for |
|---|---|---|
| SDE multiple | Recast earnings for one owner × market multiple | Owner-operated businesses, roughly under $2M in price |
| EBITDA multiple | Earnings before interest, tax, depreciation and amortisation × multiple | Larger businesses with management in place |
| Asset-based | Value of equipment, inventory and property less liabilities | Asset-heavy or low-profit businesses |
| Discounted cash flow | Present value of projected future cash flows | Businesses with predictable, growing cash flow |
General information only. Figures and rules vary by deal, lender and location.
Common mistakes
- Accepting the seller's add-backs without proof.
- Using asking prices from other listings as if they were sale prices.
- Forgetting to include the cost of replacing the owner's work.
- Ignoring working capital, inventory and equipment that needs replacing soon.
Frequently asked questions
What is a typical multiple for a small business?
Many Main Street businesses sell for roughly 2 to 4 times SDE, but the right multiple depends on the industry, size, growth, risk and how easily the business runs without the owner.
What is the difference between SDE and EBITDA?
SDE adds back one owner's salary and perks, so it shows what an owner-operator could earn. EBITDA keeps a manager's salary as a cost and is used for larger businesses.
What are add-backs?
Add-backs are expenses added back to profit because a new owner would not have them, such as the current owner's salary, one-off legal fees or personal costs paid by the business.
Do I need a professional valuation?
Not always for a small deal, but lenders often order one, and a credentialed appraiser or accountant is worth it for larger or complex purchases.
Is inventory included in the price?
It depends on the deal. Some prices include a normal level of inventory and others add inventory at cost on top. Confirm this in the letter of intent.
How does the lease affect value?
A short, non-assignable or above-market lease lowers value because the business may have to move or pay more. A long lease with renewal options supports a higher price.
Ready to move forward?
Questions about this step? Email [email protected] and we will point you to the right guide.
BusinessBuy.site provides free educational information, not legal, tax, lending or investment advice. Speak to a qualified accountant, attorney or lender about your deal.